<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

(MARK ONE)

<TABLE>
<S>        <C>
/X/        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
           (FEE REQUIRED)

                            FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                                OR

/ /        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
           (NO FEE REQUIRED)
</TABLE>

      FOR THE TRANSITION PERIOD FROM                  TO

                          COMMISSION FILE NO. 0-28938

                                 COAST BANCORP

             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                       <C>
              CALIFORNIA                                77-0401327
   (State or other jurisdiction of                   (I.R.S. Employer
    incorporation or organization)                 Identification No.)

           740 FRONT STREET                               95060
        (Address of principal                           (Zip Code)
          executive offices)
</TABLE>

                             SANTA CRUZ, CALIFORNIA

                (City and State of principal executive offices)

       Registrant's telephone number, including area code  (408) 458-4500
                           --------------------------

       Securities to be registered pursuant to Section 12(b) of the Act:

<TABLE>
<S>                                       <C>
                                                 NAME OF EACH EXCHANGE ON
         TITLE OF EACH CLASS                       WHICH EACH CLASS IS
         TO BE SO REGISTERED                         TO BE REGISTERED
                 None                                      None
</TABLE>

       Securities to be registered pursuant to Section 12(g) of the Act:

<TABLE>
<S>                                       <C>
     COMMON STOCK (NO PAR VALUE)              NASDAQ NATIONAL MARKET SYSTEM
        (Title of each class)                (Name of each exchange on which
                                                       registered)
</TABLE>

                           --------------------------

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

    The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of its common stock on March 20, 1998,
on the NASDAQ National Market System was $51,672,208.

    At March 20, 1998, 2,188,059 shares of the registrant's common stock (no par
value) were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                                                                                                          PARTS OF FORM 10-K
                                                                                                              INTO WHICH
DOCUMENTS INCORPORATED                                                                                       INCORPORATED
------------------------------------------------------------------------------------------------------  ----------------------
<S>                                                                                                     <C>
Definitive proxy statement for the Company's 1998 Annual Meeting of Shareholders to be filed within
  120 days of the end of the fiscal year ended December 31, 1997......................................         Part III
</TABLE>

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<PAGE>
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                  PAGE
                                                                                                                  -----
<S>           <C>                                                                                              <C>
PART I

ITEM 1.       BUSINESS.......................................................................................           1

ITEM 2.       PROPERTIES.....................................................................................          10

ITEM 3.       LEGAL PROCEEDINGS..............................................................................          10

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................          11

PART II

ITEM 5.       MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................          11

ITEM 6.       SELECTED FINANCIAL DATA........................................................................          12

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........          13

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................          27

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................          28

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........          48

PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................          48

ITEM 11.      EXECUTIVE COMPENSATION.........................................................................          48

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................          48

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................          48

PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................          48

INDEX TO EXHIBITS............................................................................................          49

SIGNATURES...................................................................................................          50
</TABLE>
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

GENERAL

    Coast Bancorp ("Company") is a California corporation and the bank holding
company for Coast Commercial Bank ("Bank"), located in Santa Cruz, California.
The Bank was incorporated as a California state banking corporation on April 27,
1981, and commenced operations on February 17, 1982. The Company was
incorporated on January 27, 1995 and became the bank holding company for the
Bank on July 25, 1995, pursuant to the Bank Holding Company Act.

GENERAL BANKING SERVICES

    The Bank engages in a broad range of financial services activities in its
primary market of Santa Cruz County, and also serves the adjacent areas of San
Benito, Santa Clara and Monterey counties. The City of Santa Cruz, situated 80
miles south of San Francisco and 35 miles southwest of San Jose, is the largest
city in Santa Cruz County.

    The Bank emphasizes the needs of local business people and serves
individuals, retailers, professionals and small and medium-sized businesses and
operates through its corporate offices located in Santa Cruz, California and
through its branch offices located in Santa Cruz, Aptos, Scotts Valley and
Watsonville, California. Services offered include a full range of commercial
banking services, including the acceptance of demand, savings and time deposits,
overdraft protection for checking accounts, and the making of commercial, real
estate (including residential mortgage), personal, home improvement, automobile
and other installment and term loans. The Bank is one of the largest Small
Businesses Administration ("SBA") lenders in California and has been granted
status as a "preferred lender," allowing it to make SBA loans without first
having the SBA approve the loan, and is also a seller/servicer of Freddie Mac
mortgage loans. It also offers travelers' checks, safe deposit boxes, notary
public services, Visa credit cards, courier service for pick-up of non-cash
deposits, ATM cards usable at many ATM's nationwide and a 24 hour telephone
service for deposit and loan account information. The Bank operates automated
teller machines at its branches and at Seascape Village in Aptos, California.
The Bank also has an Investment Services Department which provides financial
planning services, financial consulting, asset management and the purchase and
sale of stocks and bonds through a third party provider.

    The total population base in Santa Cruz County is approximately 249,000
people. Santa Cruz County's economic base has several significant components
including education (e.g., the University of California at Santa Cruz); disk
drive and software companies headquartered in the Northern part of the county
due to its proximity to the high tech base of Silicon Valley in adjacent Santa
Clara County; tourism because of the beaches and Santa Cruz Boardwalk; and
agriculture in the Southern part of the county in and around Watsonville.

    The Bank currently has no applications pending to open additional branch
offices, but the Bank may increase the number of its banking facilities in the
Bank's trade areas when such expansion is appropriate. Banking facilities that
may be considered in any future expansion include traditional branch offices and
mini-branch offices as in-fill strategies and loan production offices in
neighboring counties. No such facilities are currently under development. The
Bank's expansion is, of course, dependent on obtaining the necessary
governmental approvals, a continued earnings pattern and absence of adverse
effects from economic conditions, governmental monetary policies or competition.
No assurance can be given that the Bank's expansion can be accomplished without
the Bank being required to raise additional capital in the future.

    The Bank is a member of the Federal Deposit Insurance Corporation ("FDIC")
and each depositor's account is insured up to $100,000. The Bank does not
directly offer trust services or international banking services and does not
plan to do so in the near future.

                                       1
<PAGE>
COMPETITION

    The Bank's service area consists of Santa Cruz County and extends into the
adjacent areas of San Benito, Santa Clara and Monterey counties. It is estimated
that Santa Cruz County contains 35 competitive banking offices, of which 2
offices are owned by other independent banks. However, the Bank is the only
independent bank headquartered in Santa Cruz County. It is estimated that the
primary service area also contains 20 offices of savings and loan associations,
and 5 offices of credit unions. Based upon total bank deposits as of June 30,
1996 (the last period for which data is available), the Bank is sixth in market
share in Santa Cruz County.

    The banking business in California generally, and in the Bank's primary
service area specifically is highly competitive with respect to both loans and
deposits, and is dominated by a relatively small number of major banks with many
offices operating over a wide geographic area. Among the advantages such major
banks have over the Bank are their ability to finance wide ranging advertising
campaigns and to allocate their investment assets to regions of highest yield
and demand. Such institutions offer certain services such as trust services and
international banking which are not offered directly by the Bank (but are
offered indirectly through correspondent institutions), and, by virtue of their
greater total capitalization (legal lending limits to an individual customer are
limited to a percentage of a bank's total capital), they have substantially
higher lending limits than does the Bank. Other entities, both governmental and
in private industry, seeking to raise capital through the issuance and sale of
debt or equity securities also provide competition for the Bank in the
acquisition of deposits. The Bank also competes with money-market funds for
deposits.

    In order to compete with major financial institutions and other competitors
in its service areas, the Bank builds and retains its customer base by drawing
upon the experience of its executive and senior officers in serving business
individuals, and upon its specialized services, local promotional activities and
the personal contacts made by its officers, directors and employees. The
officers and employees of the Bank are strongly encouraged to participate in
local civic and charitable organizations and events, which has also served to
promote the Bank's business. For customers whose loan demand exceeds the Bank's
legal lending limit, the Bank may arrange for such loans on a participation
basis with correspondent banks. The Bank's lending limit is 15% of its capital
and allowance for credit losses for unsecured loans and 25% of its capital and
allowance for credit losses for secured loans.

DEPOSITS

    Most of the Bank's deposits are attracted from individuals, small and
medium-sized businesses and professionals. No single customer relationship
accounts for a significant portion of the Bank's deposits.

LENDING ACTIVITIES

    The Bank engages in a full complement of lending activities, including
commercial, real estate, SBA and consumer/installment loans.

    According to reports from the SBA for the federal fiscal year ended
September 30, 1997, the Bank is one of the largest lenders in Northern
California in the SBA loan program. The Bank makes SBA loans from $20,000 to
$1,500,000. SBA 7(a) loans are for working capital, inventory and other
purposes, and are government-guaranteed up to 80% of the loan amount. The Bank
also makes SBA loans for the purchase or construction of owner occupied real
estate which are also guaranteed up to 80%. The SBA loan program is subject to
political and budgetary uncertainty which in recent years has resulted in a
reduction of the guaranteed portion of SBA loans and lower maximum loan amounts.
For example, during the federal fiscal year ended September 30, 1995, budgetary
constraints required the SBA to lower the maximum loan amount to $500,000. In
October 1995, legislation restored the maximum loan amount to $1,500,000 and
imposed additional fees on the program's lenders to raise additional revenue for
the SBA.

    The Bank also makes commercial real estate loans for other purposes such as
the purchase or refinance of offices, warehouses, professional buildings, and
industrial buildings, including SBA loans. A

                                       2
<PAGE>
portion of these loans are SBA loans which are guaranteed by the U.S. government
in an amount up to 90% of the loan. Commercial real estate loans generally are
fully amortized over 15 years or have a 10 year term with a twenty-five year
amortization, and typically have a maximum loan to value ratio of 70%. SBA loans
for this purpose have a term of up to 25 years and a maximum loan to value ratio
of 90%. The Bank had outstanding real estate term loans of $76,101,000 or 52% of
the Bank's loan portfolio at December 31, 1997.

    The Bank makes commercial loans to small-to-medium sized businesses for
working capital, lines of credit, loans secured by inventory and receivables,
and term loans for equipment and for working capital. Typically, the Bank
obtains a security interest in the collateral being financed or in other
available assets of the customer. Loan to value ratios vary but generally do not
exceed 80%. As of December 31, 1997, the Bank had $42,838,000 in loans for these
purposes representing 29% of the Bank's loan portfolio.

    The Bank makes real estate construction loans for the construction of single
and multi-family residential units, commercial and industrial properties, and
SBA approved owner occupied commercial real estate. These loans typically have
pre-qualified take outs for permanent financing or stand-by commitments and a
maximum loan to value ratio of 70%. The Bank also makes loans for lot or land
development with a maximum loan to value ratio of 60%. Construction loans are
secured by a first deed of trust. As of December 31, 1997, the Bank had
outstanding real estate construction loans of $21,376,000 representing 15% of
the Bank's loan portfolio.

    Consumer and installment loans are made for household, family and other
personal expenditures on both a secured and unsecured basis. As of December 31,
1997 the Bank had a total of $6,112,000 in consumer and installment loans
representing 4% of the Bank's loan portfolio.

    The Bank makes residential mortgage loans which are typically 30 year loans
with either adjustable or fixed interest rates. These loans are sold to Freddie
Mac on a "servicing retained" basis, i.e., the Bank continues to be paid a fee
for collecting payments on the loan and performing other services, or to other
investors on a "servicing released" basis, i.e. the Bank has no further
involvement in the loan.

    The Bank sells the guaranteed portion of SBA loans which it originates into
the secondary market as a source of liquidity and earnings. Additionally, the
Bank sells residential mortgage loans it originates into the secondary market in
order to divest itself of the interest rate risk associated with these mostly
fixed interest rate products. No recourse is available to buyers of these loans
after 90 days from the sale. Total loans serviced by the Bank for other
investors were $128,081,000 as of December 31, 1997. For the years ended
December 31, 1997, 1996 and 1995, total loans sold by the Bank were $48,255,000,
$38,497,000, and $20,835,000, respectively.

    Through 1995, the Bank accounted for these loan sales in accordance with the
Emerging Issues Task Force Issues No. 88-11, "Allocation of Recorded Investment
When a Loan or Part of a Loan is Sold," No. 86-38, "Implications of Mortgage
Prepayments on Amortization of Servicing Rights," and No. 84-21, "Sale of a Loan
with a Partial Participation Retained". Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights" issued by the Financial Accounting
Standards Board (FASB). This statement eliminated the accounting distinction
between rights to service mortgage loans for others that are acquired through
loan origination activities and those acquired through purchase transactions.
Under this statement, if the Company sells or securitizes loans and retains the
mortgage servicing rights, the Company should allocate the total cost of the
mortgage loan to the loan and the mortgage servicing rights based on their
relative fair values. Any cost allocated to the mortgage servicing rights should
be recognized as a separate asset and amortized over the period of estimated net
service income. The adoption of SFAS No. 122 did not have a significant effect
on the Company's financial position or results of operations.

    The FASB issued SFAS No. 125, "Accounting for Transfer and Servicing of
Financial Assets and Extinguishments of Liabilities" in June 1996 effective for
transactions occurring after December 31, 1996. SFAS No. 125 supercedes SFAS No.
122 and requires that an asset seller must meet defined conditions to
demonstrate that it has surrendered control over the assets. The failure to meet
these conditions usually

                                       3
<PAGE>
results in on-balance-sheet treatment for the assets and a liability for the
sale proceeds received. SFAS No. 125 also requires that contracts to service are
recorded as an asset or a liability based on fair value or on an allocation of
the carrying amount of the financial asset. SFAS 125 covers subsequent
accounting, including impairments, and eliminates the distinction between excess
and normal servicing. The Company adopted SFAS 125 effective January 1, 1997 and
the adoption of SFAS No. 125 did not have a significant impact on the Company's
financial position or results of operations.

    Credit risk relates to the ability of a borrower to repay the principal and
interest on their loan and is managed by adherence to credit standards and the
taking of collateral to secure most of the Bank's loans. These risks are
generally inherent in commercial lending. Certain risks are specific to
particular types of lending in which the Bank engages such as real estate
lending. The major risk inherent in real estate lending is the potential decline
in the value of the property for market reasons or due to the condition of the
property.

OTHER SERVICES

    The Bank has its own Investment Services Department which employs 2
investment professionals. The Investment Services Department offers financial
planning services; asset management services through the use of two unaffiliated
investment managers; retirement plans such as 401(k) plans, IRAs and SEPs;
mutual funds; and the purchase and sale of stocks and bonds on an unsolicited
basis.

    The Investment Services Department also offers trust services through
Enterprise Trust and Investment Company of Los Gatos, California, an
unaffiliated independent trust company.

SUPERVISION AND REGULATION

    The Bank is chartered under the banking laws of the State of California and
is subject to the supervision of, and is regularly examined by, the
Superintendent and the FDIC.

    The Company is a bank holding company within the meaning of The Bank Holding
Company Act, as amended, ("BHC Act"), is registered as such with and is subject
to the supervision of the Federal Reserve Board ("FRB").

    Certain legislation and regulations affecting the businesses of the Company
and the Bank are discussed below.

GENERAL

    As a bank holding company, the Company is subject to the BHC Act. The
Company reports to, registers with, and is examined by the FRB. The FRB also has
the authority to examine the Company's subsidiaries which includes the Bank.

    The FRB requires the Company to maintain certain levels of capital. See
"Capital Standards" herein. The FRB also has the authority to take enforcement
action against any bank holding company that commits any unsafe or unsound
practice, or violates certain laws, regulations, or conditions imposed in
writing by the FRB.

    Under the BHC Act, a company generally must obtain the prior approval of the
FRB before it exercises a controlling influence over, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of any bank or bank holding company. Thus, the Company is required to obtain the
prior approval of the FRB before it acquires, merges or consolidates with any
bank, or bank holding company; any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the FRB's
approval.

    The Company is generally prohibited under the BHC Act from acquiring
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than banking, managing banks, or providing services to
affiliates of the holding company. A bank holding company, with the approval of
the FRB, may engage, or

                                       4
<PAGE>
acquire the voting shares of companies engaged, in activities that the FRB has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. A bank holding company must demonstrate that
the benefits to the public of the proposed activity will outweigh the possible
adverse effects associated with such activity.

    The FRB generally prohibits a bank holding company from declaring or paying
a cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. See
"Restrictions on Dividends and Other Distributions" elsewhere in this document.

    Transactions between the Company, the Bank and any future subsidiaries of
the Company are subject to a number of other restrictions. FRB policies forbid
the payment by bank subsidiaries of management fees which are unreasonable in
amount or exceed the fair market value of the services rendered (or, if no
market exists, actual costs plus a reasonable profit). Additionally, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with the extension of credit, sale or lease of
property, or furnishing of services. Subject to certain limitations, depository
institution subsidiaries of bank holding companies may extend credit to, invest
in the securities of, purchase assets from, or issue a guarantee, acceptance, or
letter of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.

CAPITAL STANDARDS

    The FRB, FDIC and other federal banking agencies have risk based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets, and transactions,
such as letters of credit and recourse arrangements, which are reported as
off-balance-sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off-balance-sheet items are multiplied
by one of several risk adjustment percentages, which range from 0% for assets
with low credit risk, such as certain U.S. government securities, to 100% for
assets with relatively higher credit risk, such as business loans.

    A banking organization's risk based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off-balance-sheet
items. The regulators measure risk-adjusted assets and off-balance-sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most other intangible assets. Tier 2
capital may consist of a limited amount of the allowance for possible loan and
lease losses and certain other instruments with some characteristics of equity.
The inclusion of elements of Tier 2 capital are subject to certain other
requirements and limitations of the federal banking agencies. Since December 31,
1992, the federal banking agencies have required a minimum ratio of qualifying
total capital to risk-adjusted assets and off-balance-sheet items of 8%, and a
minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance-sheet
items of 4%.

    In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however,

                                       5
<PAGE>
that an institution with a 3% leverage ratio would receive the highest rating by
the regulators since a strong capital position is a significant part of the
regulators' rating. For all banking organizations not rated in the highest
category, the minimum leverage ratio is at least 100 to 200 basis points above
the 3% minimum. Thus, the effective minimum leverage ratio, for all practical
purposes, is at least 4% or 5%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.

    The following table presents the capital ratios for the Company and the Bank
as of December 31, 1997.

<TABLE>
<CAPTION>
                                                                                                                 MINIMUM
                                                                              THE COMPANY      THE BANK        REQUIREMENT
                                                                            ---------------  -------------  -----------------
<S>                                                                         <C>              <C>            <C>
Risk-based Capital Ratios:
  Tier 1 Capital..........................................................          15.4%           13.9%             4.0%
  Total Capital...........................................................          16.7%           15.1%             8.0%
Tier 1 Capital Leverage Ratio.............................................          10.3%            9.3%             4.0%
</TABLE>

RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS

    The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. Federal law
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.

    The FRB has issued a policy statement that a bank holding company should not
declare or pay a cash dividend to its stockholders if the dividend would place
undue pressure on the capital of its subsidiary banks or if the dividend could
be funded only through additional borrowings or other arrangements that might
adversely affect the financial position of the bank holding company.
Specifically, a bank holding company should not continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to fully
fund each dividend and its prospective rate of earnings retention appears
consistent with its capital needs, asset quality, and overall financial
condition. Further, the Company is expected to act as a source of financial
strength for each of its subsidiary banks and to commit resources to support
each subsidiary bank in circumstances when it might not do so absent such
policy.

    The Company's ability to pay dividends depends in large part on the ability
of the Bank to pay management fees and dividends to the Company. The ability of
its subsidiary banks to pay dividends will be subject to restrictions set forth
in the California Banking Law and regulations of the FDIC.

    The payment of dividends by a state bank is further restricted by additional
provisions of state law. Under Section 642 of the California Financial Code,
funds available for cash dividend payments by a bank are restricted to the
lesser of: (i) retained earnings; or (ii) the bank's net income for its three
fiscal years (less any distributions to stockholders made during such period).
However, under Section 643 of the California Financial Code, with the prior
approval of the Commissioner, a bank may pay cash dividends in an amount not to
exceed the greater of the: (1) retained earnings of the bank; (2) net income of
the bank for its last fiscal year; or (3) net income of the bank for its current
fiscal year. However, if the Commissioner finds that the stockholders' equity of
the bank is not adequate or that the payment of a dividend would be unsafe or
unsound, the Commissioner may order such bank not to pay a dividend to
stockholders. Currently, it is permissible for the Bank to pay cash dividends
without the Commissioner's prior approval.

    Additionally, under Federal law, a bank may not make any capital
distribution, including the payment of dividends, if after making such
distribution the bank would be in any of the "under-capitalized" categories
under the FDIC's Prompt Corrective Action regulations.

                                       6
<PAGE>
    Also, under the Financial Institution's Supervisory Act, the FDIC also has
the authority to prohibit a bank from engaging in business practices which the
FDIC considers to be unsafe or unsound. It is possible, depending upon the
financial condition of a bank and other factors, that the FDIC could assert that
the payment of dividends or other payments in some circumstances might be such
an unsafe or unsound practice and thereby prohibit such payment.

INTERSTATE BANKING AND BRANCHING

    On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was signed into law. This
Interstate Act effectively permits nationwide banking. The Interstate Act
provides that one year after enactment, adequately capitalized and adequately
managed bank holding companies may acquire banks in any state, even in those
jurisdictions that currently bar acquisition by out-of-state institutions,
subject to deposit concentration limits. The deposit concentration limits
provide that regulatory approval by the Federal Reserve Board may not be granted
for a proposed interstate acquisition if after the acquisition, the acquiror on
a consolidated basis would control more than 10% of the total deposits
nationwide or would control more than 30% of deposits in the state where the
acquiring institution is located. The deposit concentration state limit does not
apply for initial acquisitions in a state and in every case, may be waived by
the state regulatory authority. Interstate acquisitions are subject to
compliance with the Community Reinvestment Act ("CRA"). States are permitted to
impose age requirements not to exceed five years on target banks for interstate
acquisitions.

    Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks is permitted as of June
1, 1997 provided that the state has not passed legislation "opting-out" of
interstate branching. For these states that opted-out prior to June 1, 1997,
banks located in that state may not participate in interstate branching.
California passed legislation to opt-in to this legislation. Interstate
branching is also subject to a 30% statewide deposit concentration limit on a
consolidated basis, and a 10% nationwide deposit concentration limit. The laws
of the host state regarding community reinvestment, fair lending, consumer
protection (including usury limits) and establishment of branches shall apply to
the interstate branches.

    De novo branching by an out-of-state bank is not permitted unless the host
state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.

    The Interstate Act also permits bank subsidiaries of a bank holding company
to act as agents for affiliated depository institutions in receiving deposits,
renewing time deposits, closing loans, servicing loans and receiving payments on
loans and other obligations. A bank acting as agent for an affiliate shall not
be considered a branch of the affiliate. Any agency relationship between
affiliates must be on terms that are consistent with safe and sound banking
practices. The authority for an agency relationship for receiving deposits
includes the taking of deposits for an existing account but is not meant to
include the opening or origination of new deposit accounts. Subject to certain
conditions, insured saving associations which were affiliated with banks as of
June 1, 1994, may act as agents for such banks. An affiliate bank or saving
association may not conduct any activity as an agent which such institution is
prohibited from conducting as principal.

    If an interstate bank decides to close a branch located in a low-or
moderate-income area, it must comply with additional branch closing notice
requirements. The appropriate regulatory agency is authorized to consult with
community organizations to explore options to maintain banking services in the
affected community where the branch is to be closed.

    The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995 (the "Caldera Act"), effective October 2, 1995, amended
the California Financial Code to, among other matters, regulate the operations
of state banks to eliminate conflicts with and to implement the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 discussed above. The
Caldera Act includes

                                       7
<PAGE>
(1) an election to permit early interstate merger transactions; (2) a
prohibition against interstate branching through the acquisition of a branch
business unit located in California without acquisition of the whole business
unit of the California bank; and (3) a prohibition against interstate branching
through de novo establishment of California branch offices. The Caldera Act
mandates that initial entry into California by an out-of-state institution be
accomplished by acquisition of or merger with an existing whole bank which has
been in existence for at least five years.

COMMUNITY REINVESTMENT ACT

    Banks are subject to the Community Reinvestment Act ("CRA") which was
enacted in 1977 to promote lending by financial institutions to individuals and
businesses located in low and moderate income areas. New CRA regulations went
into effect as of July 1, 1997. Under the former CRA regulations, compliance was
evaluated by an assessment of the institution's methods for determining, and
efforts to meet, the credit needs of such borrowers. This system was highly
criticized by depository institutions and their trade groups as subjective,
inconsistent and burdensome, and by consumer representatives for its alleged
failure to aggressively penalize poor CRA performance by financial institutions.
The revised CRA regulations emphasize an assessment of actual performance rather
than of the procedures followed by a bank, to evaluate compliance with the CRA.
Overall CRA compliance continues to be rated across a four-point scale from
"outstanding" to "substantial noncompliance," and continues to be a factor in
review of applications to merge, establish new branches or form bank holding
companies. In addition, any bank rated in "substantial noncompliance" with the
revised CRA regulations may be subject to enforcement proceedings.

    The regulations provide that "small banks", which are defined to include any
independent bank with total assets of less than $50 million, are to be evaluated
by means of a so-called "streamlined assessment method" unless such a bank
elects to be evaluated by one of the other methods provided in the regulations.
The differences between the evaluation methods may be summarized as follows:

    (1) The "streamlined assessment method" presumptively applicable to small
banks requires that a bank's CRA compliance be evaluated pursuant to five
"assessment criteria," including its (i) loan-to-deposit ratio (as adjusted for
seasonal variations and other lending-related activities, such as sales to the
secondary market or community development lending); (ii) percentage of loans and
other lending-related activities in the bank's service area(s); (iii)
distribution of loans and other lending-related activities among borrowers of
different income levels, given the demographic characteristics of its service
area(s); (iv) geographic distribution of loans and other lending-related
activities within its service area(s); and (v) record of response to written
complaints, if any, about its CRA performance.

    (2) The "lending, investments and service tests method" is applicable to all
banks larger than $250 million which are not wholesale or limited purpose banks
and do not elect to be evaluated by the "strategic plan assessment method."
Central to this method is the requirement that such banks collect and report to
their primary federal banking regulators detailed information regarding home
mortgage, small business and farm and community development loans which is then
used to evaluate CRA compliance. At the bank's option, data regarding consumer
loans and any other loan distribution it may choose to provide also may be
collected and reported.

    Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its community
development loans, the innovativeness or flexibility of its lending practices to
meet low and moderate income credit needs and, at the bank's election, lending
by affiliates or through consortia or third-parties in which the bank has an
investment interest; (ii) investment performance by measure of the bank's
"qualified investments," that is, the extent to which the bank's investments,
deposits, membership shares in a credit union, or grants primarily to benefit
low or moderate income individuals and small businesses and farms, address
affordable housing or other needs not met by the private market, or assist any
minority or women-owned depository institution by donating, selling on favorable
terms or provisioning on a rent-free basis any branch of the bank located in a
predominately minority neighborhood; and (iii) service performance by evaluating
the demographic distribution of the bank's branches and ATMs, its

                                       8
<PAGE>
record of opening and closing them, the availability of alternative retail
delivery systems (such as telephone banking, banking by mail or at work, and
mobile facilities) in low and moderate income geographies and to low and
moderate income individuals, and (given the characteristics of the bank's
service area(s) and its capacity and constraints) the extent to which the bank
provides "community development services" (services which primarily benefit low
and moderate income individuals or small farms and businesses or address
affordable housing needs not met by the private market) and their innovativeness
and responsiveness.

    (3) Wholesale or limited purpose banks which do not make home mortgage,
small farm or business or consumer loans to retail customers may elect, subject
to agency approval of their status, to be evaluated by the "community
development test method," which assesses the number and amount of the bank's
community development loans, qualified investments and community development
services and their innovativeness and complexity.

    (4) Any bank may request to be evaluated by the "strategic plan assessment
method" by submitting a strategic plan for review and approval. Such a plan must
involve public participation in its preparation, and contain measurable goals
for meeting low and moderate income credit needs through lending, investments
and provision of services. Such plans generally will be evaluated by measuring
strategic plan goals against standards similar to those which will be applied in
evaluating a bank according to the "lending, investments and service test
method."

YEAR 2000 DATA PROCESSING ISSUES

    The Federal Financial Institution Examination Council ("FFIEC") has issued
an interagency statement and a supplement thereto addressing the business risk
related to the problem of computers which are not programmed to recognize the
Year 2000. Many computer programs are programmed to determine the year based
solely on the last two digits entered and recognize the digits "00" as the year
1900. These programs must be reprogrammed to recognize the year 2000 or they
will not be able to function properly after December 31, 1999.

    The FFIEC has established guidelines for all banks to ensure that their
systems recognize the Year 2000. The requirements include establishing,
implementing and monitoring a Year 2000 plan; efforts to monitor the progress of
vendors in changing systems used by banks; requiring bank management to provide
status reports to its board of directors at least quarterly regarding the bank's
internal corrective efforts; and monitoring the ability of the bank's vendors to
provide Year 2000 compliant products and services. Federal banking agencies will
be examining banks for Year 2000 compliance.

INTER-COMPANY BORROWINGS

    Bank holding companies are also restricted as to the extent to which they
and their subsidiaries can borrow or otherwise obtain credit from one another,
or engage in certain other transactions. The "covered transactions" that an
insured depository institution and its subsidiaries are permitted to engage in
with their nondepository affiliates are limited to the following amounts: (1) in
the case of any one such affiliate, the aggregate amount of covered transactions
of the insured depository institution and its subsidiaries cannot exceed 10% of
the capital stock and the surplus of the insured depository institution; and
(ii) in the case of all affiliates, the aggregate amount of covered transactions
of the insured depository institution and its subsidiaries cannot exceed 20% of
the capital stock and surplus of the insured depository institution. In
addition, extensions of credit that constitute covered transactions must be
collateralized in prescribed amounts.

    "Covered transactions" are defined by statute to include a loan or extension
of credit to the affiliate, a purchase of securities issued by an affiliate, a
purchase of assets from the affiliate (unless otherwise exempted by the Federal
Reserve Board), the acceptance of securities issued by the affiliate as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit for the benefit of an affiliate. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.

                                       9
<PAGE>
IMPACT OF MONETARY POLICIES

    Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
other borrowings, and the interest rate earned by banks on loans, securities and
other interest-earning assets comprises the major source of banks' earnings.
Thus, the earnings and growth of banks are subject to the influence of economic
conditions generally, both domestic and foreign, and also to the monetary and
fiscal policies of the United States and its agencies, particularly the FRB. The
FRB implements national monetary policy, such as seeking to curb inflation and
combat recession, by its open-market dealings in United States government
securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements and through adjustments to the
discount rate applicable to borrowings by banks which are members of the FRB.
The actions of the FRB in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates. The nature and timing
of any future changes in such policies and their impact on the Company cannot be
predicted. In addition, adverse economic conditions could make a higher
provision for loan losses a prudent course and could cause higher loan loss
charge-offs, thus adversely affecting a bank's net earnings.

ACCOUNTING PRONOUNCEMENTS

    In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Company's 1998 consolidated financial
statements. The adoption of these statements will not have a significant impact
on the Company's financial position or results of operations.

ENVIRONMENTAL MATTERS

    The Company is not involved in any administrative or judicial proceedings
pursuant to federal, state or local laws or regulations regarding the discharge
of materials into the environment or whose purpose is to protect the
environment.

EMPLOYEES

    At December 31, 1997, the Company employed one hundred twenty-nine (129)
persons including forty-three (43) part-time employees, four (4) executive
officers and thirty-three (33) other Vice Presidents and Assistant Vice
Presidents. The Company's employees are not currently represented by a union or
covered under a collective bargaining agreement. Management of the Bank believes
that its employee relations are excellent.

ITEM 2.  PROPERTIES

    The Company's and the Bank's administrative offices are under lease through
1998. The Bank's branches and operations facilities are occupied under other
leases which expire at various dates through 2002 and in most instances, include
options to renew or extend at market rates and terms.

ITEM 3.  LEGAL PROCEEDINGS

    The Company is a party to routine litigation which is incidental to its
business. As of December 31, 1997, there are no pending legal proceedings to
which the Company is a party which may have a materially adverse effect upon the
Company's financial position or results of operations.

                                       10
<PAGE>
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matters were submitted to a vote of the stockholders of the Company's
common stock during the fourth quarter of 1997.

                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

    A. The Company's Common Stock trades on The NASDAQ Stock Market-SM- under
the symbol CTBP. The Company's Common Stock began trading on the The NASDAQ
Stock Market-SM- on February 19, 1997. Prior to that time, the Company's Common
Stock was listed on the NASDAQ Bulletin Board and was the subject of limited
trading.

    The prices indicated below may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                                   SALE PRICE OF THE
                                                                    COMPANY'S COMMON
                                                                         STOCK
                                                                  --------------------
QUARTER ENDED 1997                                                   BID        ASK
----------------------------------------------------------------  ---------  ---------
<S>                                                               <C>        <C>
March 31........................................................  $   18.38  $   25.50
June 30.........................................................      21.25      25.00
September 30....................................................      23.50      34.00
December 31.....................................................      30.00      37.50

QUARTER ENDED 1996
----------------------------------------------------------------
March 31........................................................  $   13.00  $   15.00
June 30.........................................................      14.00      16.25
September 30....................................................      15.00      17.00
December 31.....................................................      19.00      20.00
</TABLE>

    B.  As of March 20, 1998, the approximate number of holders of the Company's
Common Stock was 385. In addition, the approximate number of beneficial
shareholders was 436.

    C.  The Company paid a cash dividend of $0.14 per share in the first quarter
of 1998 cash dividends of $0.115 per share in each quarter during 1997; and cash
dividends of $0.10 per share in each quarter of 1996.

    There can be no assurances that the Company will pay either cash or stock
dividends in the future.

    The Company considers the payment of cash dividends in order to return a
portion of its profits to stockholders. In considering the amount of cash
dividends to be paid, if any, the Company considers the maintenance of a
consistent dividend policy as part of its effort to make the Company's stock
attractive to investors; the amount and frequency of dividends; the payout
ratio; the need of the Company to have sufficient funds available to pay its
expenses; and compliance with applicable laws, regulations and other regulatory
requirements.

    California law provides that in order to declare dividends: (i) after a
corporation has paid a dividend to its stockholders, it must be likely that the
corporation will be able to meet its liabilities as they mature; and (ii) the
amount of the corporation's retained earnings immediately prior to the payment
of the dividend must be equal to or exceed the amount of the proposed cash
dividend.

    The Company's primary source of revenue is dividends from its subsidiary,
the Bank. The payment of dividends by the Bank is subject to various legal and
regulatory requirements. See Item 1 "Restrictions on Dividends and Other
Distributions."

                                       11
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

    Presented below is selected financial data for the Company for the last five
years. The Company became the bank holding company for the Bank on July 25,
1995.

    The selected consolidated financial data presented below for, and as of the
end of, each of the years in the five-year period ended December 31, 1997 is
derived from the audited consolidated financial statements of the Company. The
following data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                 ----------------------------------------------------------
                                                    1997        1996        1995        1994        1993
                                                 ----------  ----------  ----------  ----------  ----------
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S>                                              <C>         <C>         <C>         <C>         <C>
INCOME STATEMENT SUMMARY:
Net interest income............................  $   15,052  $   13,435  $   12,366  $    9,936  $    8,953
Provision for credit losses....................         450         900         900         600         850
Noninterest income.............................       5,060       4,898       3,558       4,044       5,184
Noninterest expenses...........................      11,006      10,539       9,855       9,463       8,895
Income before income taxes.....................       8,656       6,894       5,169       3,917       4,392
Provision for income taxes.....................       3,501       2,766       2,020       1,479       1,731
Net income.....................................       5,155       4,128       3,149       2,438       2,661

PERIOD END:
Total loans, gross.............................     146,427  $  123,721  $  106,840  $   97,648  $   92,488
Assets.........................................     261,505     236,915     207,668     175,861     153,129
Deposits.......................................     201,197     185,467     164,046     152,130     135,573
Stockholders' equity...........................      27,764      23,193      20,984      17,710      16,280

AVERAGES FOR PERIOD:
Total loans, gross.............................     128,974  $  115,743  $   99,842  $   94,273  $   99,319
Earning assets.................................     226,650     199,588     167,089     144,093     138,945
Assets.........................................     247,378     217,735     184,977     161,686     155,490
Deposits.......................................     193,260     171,096     151,960     143,195     138,738
Stockholders' equity...........................      25,092      21,466      19,538      17,113      15,165

SELECTED RATIOS:
Net interest margin............................         6.6%        6.7%        7.4%        6.9%        6.4%
Efficiency ratio...............................        54.7%       57.5%       61.9%       67.7%       62.9%
Allowance for credit losses to total loans.....         2.5%        2.6%        2.3%        1.9%        1.9%
Return on average assets.......................         2.1%        1.9%        1.7%        1.5%        1.7%
Return on beginning stockholders' equity.......        22.2%       19.7%       17.8%       15.0%       19.3%
Dividend payout ratio..........................        19.7%       21.5%       26.0%       28.0%       12.9%

CAPITAL RATIOS:
Average equity to average assets...............        10.1%        9.9%       10.6%       10.6%        9.8%
Total risk-based capital ratio.................        16.7%       16.4%       16.9%       15.4%       16.1%
Tier 1 risk-based capital ratio................        15.4%       15.2%       15.7%       14.2%       14.9%
Tier 1 leverage ratio..........................        10.3%        9.8%       10.2%       10.9%       11.1%

PER SHARE DATA:
Diluted net income.............................  $     2.30  $     1.85  $     1.38  $     1.07  $     1.17
Book value.....................................  $    12.60  $    10.50  $     9.29  $     7.78  $     7.15
Cash dividends declared........................  $      .46  $      .40  $     0.36  $     0.30  $     0.15
Weighted average diluted common shares
  outstanding..................................   2,241,542   2,236,134   2,280,285   2,277,999   2,277,999
</TABLE>

                                       12
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

    The following analysis is designed to enhance the reader's understanding of
the Company's financial condition and the results of its operations as reported
in the consolidated financial statements included in this Form. This discussion
should be read in conjunction with those financial statements and the related
notes. In addition to historical information, this discussion and analysis
includes certain forward-looking statements regarding events and circumstances
which may affect the Company's future results. Such forward-looking statements
are subject to risks and uncertainties that could cause the Company's actual
results to differ materially. These risks and uncertainties include, but are not
limited to, those described in this discussion and analysis, as well as those
described in Item 1 of this report.

    The Company wishes to caution readers not to place undue reliance on any
forward-looking statements included herein, which speak only as of the date
made. The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect unanticipated events and
circumstances occurring after the date of such statements.

BUSINESS ORGANIZATION

    Coast Bancorp (the Company) is a California corporation organized in 1995 to
act as the holding company for Coast Commercial Bank (the Bank), a California
state chartered bank which opened in 1982 with headquarters in Santa Cruz and
branch offices in Aptos, Santa Cruz, Scotts Valley and Watsonville. During 1995
the Company acquired through merger all of the outstanding common stock of the
Bank. The merger was accounted for similar to a pooling of interests in that the
historical cost basis of Coast Commercial Bank has been carried forward. The
Company currently conducts no significant business activities other than its
investment in the Bank. Consequently, substantially all of the Company's net
income, assets and equity are derived from its investment in the Bank.

    The Bank engages in commercial and consumer banking, offering a range of
traditional banking products and services to individuals, retailers, small and
medium-sized businesses and professionals, primarily within the Santa Cruz
County area.

OVERVIEW

    The Company earned net income of $5,155,000 for the year ended December 31,
1997, an increase of 25% from 1996 net income of $4,128,000. Net income reported
for 1996 represented an increase of 31% from 1995 net income of $3,149,000. On a
diluted per share basis, net income for 1997 was $2.30 compared with $1.85 and
$1.38 for the preceding two years. The increase in net income in 1997 over 1996
was caused by the increases in net interest income and noninterest income
exceeding the increase in noninterest expenses and a decrease in the provision
for loan losses. The change in net income in 1996 over 1995 was due to increases
in net interest income and noninterest income exceeding the increase in
noninterest expenses.

EARNINGS SUMMARY

NET INTEREST INCOME

    Net interest income refers to the difference between interest and fees
earned on loans and investments and the interest paid on deposits and other
borrowed funds. It is the largest component of the net earnings of a financial
institution. The primary factors to consider in analyzing net interest income
are the composition and volume of earning assets and interest-bearing
liabilities, the amount of noninterest bearing liabilities and nonaccrual loans,
and changes in market interest rates.

                                       13
<PAGE>
    Table 1 sets forth average balance sheet information, interest income and
expense, average yields and rates, and net interest income and net interest
margin for the years ended December 31, 1997, 1996 and 1995.

                   TABLE 1 COMPONENTS OF NET INTEREST INCOME

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                ------------------------------------------------------------------------------------------
                                            1997                           1996                           1995
                                ----------------------------   ----------------------------   ----------------------------
                                AVERAGE              AVERAGE   AVERAGE              AVERAGE   AVERAGE              AVERAGE
                                BALANCE   INTEREST    RATE     BALANCE   INTEREST    RATE     BALANCE   INTEREST    RATE
                                --------  --------   -------   --------  --------   -------   --------  --------   -------
                                                                  (DOLLARS IN THOUSANDS)
<S>                             <C>       <C>        <C>       <C>       <C>        <C>       <C>       <C>        <C>
Assets:

Loans (1)(2)..................  $128,974  $14,383     11.2%    $115,746  $12,845     11.1%    $ 99,842  $11,804     11.8%

Securities:
  Taxable.....................    68,896    4,721      6.9%      61,929    4,235      6.8%      49,026    3,284      6.7%
  Nontaxable (3)..............     5,920      501      8.5%       6,025      509      8.4%       6,453      546      8.5%
Federal funds sold............    22,860    1,244      5.4%      15,888      832      5.2%      11,768      671      5.7%
                                --------  --------   -------   --------  --------   -------   --------  --------   -------
Total earning assets..........   226,650   20,849      9.2%     199,588   18,421      9.2%     167,089   16,305      9.8%
Cash and due from banks.......    16,603                         13,993                         13,107
Allowance for credit losses...    (3,451)                        (2,882)                        (2,135)
Unearned income...............    (1,874)                        (1,663)                        (1,606)
Bank premises and equipment,
  net.........................     2,046                          2,200                          2,691
Other assets..................     7,404                          6,499                          5,831
                                --------                       --------                       --------
Total assets..................  $247,378                       $217,735                       $184,977
                                --------                       --------                       --------
                                --------                       --------                       --------

Interest-bearing liabilities:
Deposits:
  Demand......................  $ 76,638    1,613      2.1%    $ 72,035    1,388      1.9%    $ 74,907    1,577      2.1%
  Savings.....................    29,652      950      3.2%      27,342      819      3.0%      16,854      431      2.6%
  Time........................    30,814    1,609      5.2%      23,867    1,228      5.1%      19,019      962      5.1%
                                --------  --------   -------   --------  --------   -------   --------  --------   -------
Total deposits................   137,104    4,172      3.0%     123,244    3,435      2.8%     110,780    2,970      2.7%
Borrowed funds................    26,881    1,455      5.4%      23,528    1,378      5.9%      11,537      783      6.8%
                                --------  --------   -------   --------  --------   -------   --------  --------   -------
Total interest-bearing
  liabilities.................   163,985    5,627      3.4%     146,772    4,813      3.3%     122,317    3,753      3.1%
Demand deposits...............    56,156                         47,852                         41,180
Other liabilities.............     2,145                          1,645                          1,942
Stockholders' equity..........    25,092                         21,466                         19,538
                                --------                       --------                       --------
Total liabilities and
  stockholders' equity........  $247,378                       $217,735                       $184,977
                                --------                       --------                       --------
                                --------                       --------                       --------
Net interest income and
  margin......................            $15,222      6.7%              $13,608      6.8%              $12,552      7.5%
                                          --------   -------             --------   -------             --------   -------
                                          --------   -------             --------   -------             --------   -------
</TABLE>

------------------------

(1) Loan fees totaling $1,172,000, $974,000, and $991,000 are included in loan
    interest income for 1997, 1996 and 1995, respectively.

(2) Average nonaccrual loans totaling $229,000, $511,000, and $883,000 are
    included in average loans for 1997, 1996 and 1995, respectively.

(3) Tax exempt income includes $170,000, $173,000, and $186,000 in 1997, 1996
    and 1995, respectively, to adjust to a fully taxable equivalent basis using
    the Federal statutory rate of 34%.

                                       14
<PAGE>
    Net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as "volume
change." Net interest income is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities, referred
to as "rate change." Table 2 presents changes in interest income and interest
expense for each major category of interest-earning assets and interest-bearing
liabilities. The table also reflects the amount of change attributable to volume
and rate changes for the years indicated on a fully taxable equivalent basis.

                          TABLE 2 RATE/VOLUME ANALYSIS

<TABLE>
<CAPTION>
                                                1997 COMPARED TO 1996 INCREASE   1996 COMPARED TO 1995 INCREASE
                                                          (DECREASE)                       (DECREASE)
                                                       DUE TO CHANGE IN                 DUE TO CHANGE IN
                                                -------------------------------  -------------------------------
                                                                         NET                              NET
                                                 VOLUME      RATE      CHANGE     VOLUME      RATE      CHANGE
                                                ---------  ---------  ---------  ---------  ---------  ---------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                             <C>        <C>        <C>        <C>        <C>        <C>
Interest-earning assets:
Loans.........................................  $   1,458  $     166  $   1,624  $   1,880  $    (839) $   1,041
Securities....................................        468          9        477        853         61        914
Federal funds sold............................        365         47        412        237        (76)       161
                                                ---------  ---------  ---------  ---------  ---------  ---------
Total interest income.........................      2,291        222      2,513      2,970       (854)     2,116
Interest bearing deposits:
Demand........................................        105        120        225        (60)      (129)      (189)
Savings.......................................         69         62        131        268        120        388
Time..........................................        356         31        387        245         21        266
                                                ---------  ---------  ---------  ---------  ---------  ---------
Interest expense on deposits..................        530        213        743        453         12        465
Interest expense on borrowings................        199       (121)        78        814       (219)       595
                                                ---------  ---------  ---------  ---------  ---------  ---------
Total interest expense........................        729         92        821      1,267       (207)     1,060
                                                ---------  ---------  ---------  ---------  ---------  ---------
Increase in net interest income...............  $   1,562  $     130  $   1,692  $   1,703  $    (647) $   1,056
                                                ---------  ---------  ---------  ---------  ---------  ---------
                                                ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

    For 1997, net interest income, on a fully taxable-equivalent basis, was
$15,222,000 or 6.7% of average earning assets, an increase of 12% over
$13,608,000 or 6.8% of average earning assets in the comparable period in 1996.
The increase in 1997 reflects higher levels of earning assets partially offset
by higher rates paid on interest-bearing liabilities. Net interest income in
1996, on a fully taxable-equivalent basis, was $13,608,000 or 6.8% of average
earning assets, an increase of 8% over $12,552,000 or 7.5% of average earning
assets in the comparable period in 1995. The increase in 1996 reflects higher
levels of earning assets partially offset by lower yields on loans and other
earning assets and an increase in rates paid on interet bearing deposits
corresponding generally with declining market rates since the beginning of 1995.

    Interest income, on a fully taxable-equivalent basis, was $20,849,000,
$18,421,000, and $16,305,000 for 1997, 1996, and 1995, respectively. The
increases in 1997 and 1996 resulted from the growth in average earning assets.
Loan yields averaged 11.2% in 1997, 11.1% in 1996, and 11.8% in 1995 and
generally reflect the increase in market rates from the cyclical lows in 1993
and the pull back of interest rates in 1995. Approximately 90% of the Bank's
loans have variable interest rates indexed to the prime rate. The Bank's average
prime rate was 8.44%, 8.27%, and 8.83% in 1997, 1996, and 1995, respectively.
Average earning assets were $226,650,000 for 1997, an increase of 14% over
$199,588,000 in 1996, which increased 19% over $167,089,000 in 1995. The growth
in average earning assets resulted from increased levels of deposits and
borrowings which were invested primarily in loans and securities.

    The increases in interest income during 1997 and 1996, on a fully
taxable-equivalent basis, were partially offset by increases in interest
expense. The increases were primarily due to increases in interest-bearing
deposits and the yields paid on deposits in 1997 and borrowed funds in 1996. The
average rate paid on interest bearing deposits was 3.0% in 1997, 2.8% in 1996,
and 2.7% in 1995.

                                       15
<PAGE>
NONINTEREST INCOME

    Table 3 summarizes the sources of noninterest income for the periods
indicated:

                           TABLE 3 NONINTEREST INCOME

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                      -------------------------------
                                                        1997       1996       1995
                                                      ---------  ---------  ---------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                   <C>        <C>        <C>
Customer service fees...............................  $   1,998  $   1,808  $   1,527
Gain on sale of loans...............................      1,404      1,420        678
Loan servicing fees.................................      1,038        958        875
Gains (losses) from sale of securities..............        (10)       114        (48)
Gain on sale of other real estate owned.............     --             39         65
Other...............................................        630        559        461
                                                      ---------  ---------  ---------
    Total noninterest income........................  $   5,060  $   4,898  $   3,558
                                                      ---------  ---------  ---------
                                                      ---------  ---------  ---------
</TABLE>

    The increase in customer service fees in 1997 corresponds with the growth in
deposits and manangement's focus on enhanced recovery of services provided to
customers. The enhanced recovery program included implementation of demand
deposit account analysis, reductions in waived fees and generally making the fee
structure competitive with other financial institutions. The 1996 increase in
customer service fees relates primarily to higher merchant credit card
processing fees. Gains on sale of loans increased as a result of increased SBA
loan originations during 1997 and 1996. Loan servicing fees and other
noninterest income increased consistent with loans serviced for others and the
growth of deposits.

NONINTEREST EXPENSES

    The major components of noninterest expenses stated in dollars and as a
percentage of average earning assets are set forth in Table 4 for the periods
indicated.

                          TABLE 4 NONINTEREST EXPENSES

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                            ----------------------------------------------------------------
                                                    1997                  1996                  1995
                                            --------------------  --------------------  --------------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>
Salaries and benefits.....................  $   5,692       2.51% $   5,249       2.63% $   5,009       3.00%
Equipment.................................      1,120        .50%     1,146        .57%     1,043       0.62%
Occupancy.................................        980        .43%       929        .47%       904       0.54%
Stationery and postage....................        362        .16%       382        .19%       278       0.17%
Insurance.................................        200        .09%       143        .07%       280       0.17%
Legal fees................................         84        .04%        93        .05%       200       0.12%
Other.....................................      2,568       1.13%     2,597       1.30%     2,141       1.28%
                                            ---------        ---  ---------        ---  ---------        ---
    Total noninterest expenses............  $  11,006       4.86% $  10,539       5.28% $   9,855       5.90%
                                            ---------        ---  ---------        ---  ---------        ---
                                            ---------        ---  ---------        ---  ---------        ---
</TABLE>

    Total noninterest expenses increased $467,000 or 4% to $11,006,000 in 1997
over $10,539,000 in 1996, which increased $684,000 or 7% from $9,855,000 in
1995.

    The increase in 1997 primarily resulted from higher staff costs and
increased insurance costs while the 1996 increase was primarily related to
higher staff costs and increases in other noninterest expenses partially offset
by reductions in FDIC insurance premiums. The FDIC reduced insurance premiums in
1996 as the Bank Insurance Fund reached full funding during 1995. In 1997 an
additional premium of approximately 1.3 cents per $100 of deposits was levied
against banks for the payment of certain debt issued by regulatory agencies
during the 1980's savings and loan crises. The increase in noninterest

                                       16
<PAGE>
expenses reflects the growth in total loans, deposits and assets. The decrease
in noninterest expenses as a percentage of average earning assets is the result
of the rate of growth in average earning assets in 1997 and 1996 exceeding the
rate of increase in noninterest expenses.

INCOME TAXES

    The Company's effective tax rate was 40.4% for 1997 compared to 40.1% for
1996 and 39.1% for 1995. Changes in the effective tax rate for the Company are
primarily due to fluctuations in the proportion of tax exempt income generated
from investment securities to pre-tax income.

BALANCE SHEET ANALYSIS

    Total assets increased to $261.5 million at December 31, 1997, a 10%
increase from the end of 1996. Total assets increased to $236.9 million in 1996,
a 14% increase from the $207.7 million a year earlier. Based on average
balances, 1997 average total assets of $247.4 million represent an increase of
14% over 1996 average total assets of $217.7 million which represent an increase
of 18% over 1995.

EARNING ASSETS

    LOANS

    Total gross loans at December 31, 1997 were $146.4 million, a 18% increase
from $123.7 million at December 31, 1996 which was a 16% increase from $106.8
million at December 31, 1995.

    Table 5 summarizes the composition of the loan portfolio at December 31, for
the past five years.

                             TABLE 5 LOANS BY TYPE

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                              -----------------------------------------------------
                                                1997       1996       1995       1994       1993
                                              ---------  ---------  ---------  ---------  ---------
                                                             (DOLLARS IN THOUSANDS)
<S>                                           <C>        <C>        <C>        <C>        <C>
Commercial, financial and agricultural......  $  42,838  $  35,633  $  34,263  $  32,294  $  36,047
Real estate mortgage........................     76,101     65,208     50,580     41,200     33,221
Real estate construction....................     21,376     15,112     14,008     15,717     15,559
Installment and other.......................      6,112      7,768      7,989      8,437      7,661
                                              ---------  ---------  ---------  ---------  ---------
    Total loans, gross......................  $ 146,427  $ 123,721  $ 106,840  $  97,648  $  92,488
                                              ---------  ---------  ---------  ---------  ---------
                                              ---------  ---------  ---------  ---------  ---------
</TABLE>

    Average loans in 1997 were $128,974,000 representing an increase of
$13,231,000 or 11% over 1996 and in 1996 were $115,743,000 representing an
increase of $15,901,000, or 16% over 1995. The 1997 and 1996 increases reflect
growth in average real estate loans which in the opinion of management is due to
improved local economic conditions.

    Commercial loans were $42,838,000 at the end of 1997 compared to $35,633,000
and $34,263,000 at the end of 1996 and 1995, respecitvely. The Bank makes
commercial loans primarily to serve the short- to medium-term credit demands of
small-to-medium sized businesses and professionals located in Santa Cruz County
for lines of credit, single payment and term debt obligations. Typically, loans
are collateralized by the working capital, inventory, receivables, or equipment
being financed or other assets available to the borrower. The Bank's commercial
loan portfolio is diversified as to industries and types of businesses with no
material industry concentrations and a profile which the Company believes
generally reflects the economy of Santa Cruz County. Risks include those
outlined in the Risk Elements section below.

    Real estate mortgage loans were $76,101,000 at December 31, 1997 compared to
$65,208,000 and $50,580,000 at the end of 1996 and 1995, respectively. The
increases of $10,893,000 in 1996 and $14,628,000 in 1995 resulted from the
retained portion of SBA loans and additional loan demand for nonresidential real
estate financing in the Bank's market area. Extensions of credit are based on an
analysis of the borrower's ability to generate debt service, obtain other
financing or sell the property.

                                       17
<PAGE>
Advances on nonresidential properties are limited in general to approximately
70% of the lower of cost or appraised value.

    The Bank's real estate construction loan portfolio was $21,376,000 at
December 31, 1997, compared to $15,112,000 and $14,008,000 at the end of 1996
and 1995, respectively. Construction loans represented 15% of total loans at
December 31, 1997 compared to 12% and 13% in 1996 and 1995. The Bank finances
the construction of commercial and residential properties. These loans are at
variable rates, generally have maturities of less than 12 months, and are
secured by first deeds of trust on the underlying properties. Repayment is
expected from the borrower's ability to obtain take-out financing or sell the
property. Advances on residential and commercial projects are limited in general
to the lower of approximately 80% and 70%, respectively, of cost or appraised
value of the collateral.

    Real estate mortgage and construction lending entail potential risks which
are not inherent in other types of loans. These potential risks include declines
in market values of underlying real property collateral and, with respect to
construction lending, delays or cost overruns which could expose the Company to
loss. In addition, risks in commercial real estate lending include declines in
commercial real estate values, general economic conditions surrounding the
commercial real estate properties, and vacancy rates. A decline in the general
economic conditions or real estate values within the Company's market area could
have a negative impact on the performance of the loan portfolio or value of the
collateral. Because the Company lends primarily within its market area, the real
property collateral for its loans is similarly concentrated, rather than
diversified over a broader geographic area. The Company could therefore be
adversely affected by a decline in real estate values in the Company's target
market, even if real estate values elsewhere in California generally remained
stable or increased. Risks also include those outlined in the Risk Elements
section below.

    Installment loans were $6,112,000 compared to $7,768,000 and $7,989,000 at
the end of 1997, 1996, and 1995, respectively. The installment loan portfolio
finances customers' household, family and other personal expenditures on both a
secured and unsecured basis. Risks include those outlined in the Risk Elements
section below.

RISK ELEMENTS

    Lending money involves an inherent risk of nonpayment. Through the
administration of loan policies and monitoring of the portfolio, management
seeks to reduce such risks. The allowance for credit losses is an estimate to
provide a financial buffer for losses, both identified and unidentified, in the
loan portfolio.

    Management strives to achieve a low level of credit losses by continuing
emphasis on credit quality in the loan approval process, active credit
administration and regular monitoring. An important tool in achieving a high
level of credit quality is the loan grading system to assess the risk inherent
in each loan. Additionally, management believes its ability to manage portfolio
credit risk is enhanced by lending personnel's knowledge of the Bank's service
area. Lending personnel live in the communities served by the Bank and senior
management and directors of the Company and Bank are active members of the
communities served by the Bank. Further, senior management of the Bank has
experienced minimal turnover since the inception of the Bank in 1982.

    Ultimately, credit quality may be influenced by underlying trends in the
economic and business cycles. Management believes that its lending policies and
underwriting standards will tend to minimize losses in an economic downturn,
however, there is no assurance that losses will be limited under such
circumstances. The Bank's loan policies and underwriting standards include, but
are not limited to, the following: 1) maintaining a thorough understanding of
the Bank's service area and limiting investments outside of this area, 2)
maintaining a thorough understanding of the borrowers' knowledge and capacity in
their field of expertise, 3) basing real estate construction loan approval not
only on marketability of the project, but also on the borrowers' capacity to
support the project financially in the event it does not sell within the
original projected time period, and 4) maintaining conforming and prudent loan
to value and loan to cost ratios based on independent outside appraisals and
ongoing inspection and analysis by the Bank's

                                       18
<PAGE>
construction lending officers. In addition, the Bank strives to diversify the
risk inherent in the construction portfolio by avoiding concentrations to
individual borrowers and on any one project.

    Management regularly reviews and monitors the loan portfolio to determine
the risk profile of each credit, and to identify credits whose risk profiles
have changed. This review includes, but is not limited to, such factors as
payment status, the financial condition of the borrower, borrower compliance
with loan convenants, underlying collateral values, potential loan
concentrations, and general economic conditions. When potential problem credits
are identified by management, action plans for each credit are developed for
bank personnel to mitigate the credit risk through measures such as increased
monitoring, debt reduction goals, addition collateral and possible credit
restructuring opportunities.

NONACCRUAL LOANS, LOANS PAST DUE AND OREO

    The accrual of interest is discontinued and any accrued and unpaid interest
is reversed when the payment of principal or interest is 90 days past due unless
the amount is well secured and in the process of collection. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. At December 31, 1997 nonaccrual
loans totaled $266,000 or .2% of total loans compared to $159,000 or .1% at
December 31, 1996 and $824,000 or .8% at December 31, 1995. If the nonaccrual
loans at December 31, 1997 had not been on nonaccrual, $24,000 of interest
income would have been realized in 1997. The Company realized $18,000 on these
nonaccrual loans in 1997.

    The Company's level of nonperforming assets, in particular nonaccrual loans,
is at historically low levels. Management believes the level of nonperforming
assets, including nonaccrual loans, will fluctuate throughout business and
economic cycles, and there is no assurance the current level of nonperforming
assets can be sustained.

    Table 6 presents the composition of nonperforming assets at December 31 for
the last 5 years.

                          TABLE 6 NONPERFORMING ASSETS

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                     -----------------------------------------------------
                                                       1997       1996       1995       1994       1993
                                                     ---------  ---------  ---------  ---------  ---------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                                  <C>        <C>        <C>        <C>        <C>
Nonperforming Assets:
  Loans Past Due 90 Days or More...................  $  --      $      50  $       3  $  --      $     871
  Nonaccrual Loans.................................        266        159        824        848      1,427
                                                     ---------  ---------  ---------  ---------  ---------
Total Nonperforming Loans..........................        266        209        827        848      2,298
OREO...............................................        112        551        830      1,419        364
                                                     ---------  ---------  ---------  ---------  ---------
Total Nonperforming Assets.........................  $     378  $     760  $   1,657  $   2,267  $   2,662
                                                     ---------  ---------  ---------  ---------  ---------
                                                     ---------  ---------  ---------  ---------  ---------
Nonperforming Loans as a Percent of Total Loans....      0.18%      0.17%      0.77%      0.87%      2.48%
OREO as a Percent of Total Assets..................      0.04%      0.23%      0.40%      0.81%      0.24%
Nonperforming Assets as a Percent of Total
  Assets...........................................      0.14%      0.32%      0.80%      1.29%      1.74%
Allowance for Loan Losses..........................  $   3,609  $   3,158  $   2,478  $   1,859  $   1,723
  As a Percent of Total Loans......................      2.46%      2.55%      2.32%      1.90%      1.86%
  As a Percent of Nonaccrual Loans.................      1357%      1986%       301%       219%       121%
  As a Percent of Nonperforming Loans..............      1357%      1511%       300%       219%        75%
</TABLE>

    There were no loans at December 31, 1997 where management had serious doubts
about the borrower's ability to comply with loan repayment terms and which may
result in disclosure as a nonaccrual, past due or restructured loan, except as
disclosed in Table 6.

    For a discussion of concentrations in the Company's loan portfolio, see Note
10 of Notes to Consolidated Financial Statements.

                                       19
<PAGE>
PROVISION AND ALLOWANCE FOR CREDIT LOSSES

    Management has established an evaluation process designed to determine the
adequacy of the allowance for credit losses. This process attempts to assess the
risk of loss inherent in the portfolio by segregating the allowance for credit
losses into three components: "historical losses;" "specific;" and "margin for
imprecision." The "historical losses" component is calculated as a function of
the prior four years loss experience for commercial, real estate and consumer
loan types. The four years are assigned weightings of 35%, 30%, 20% and 15%
beginning with the most recent year. The "specific" component is established by
allocating a portion of the allowance to individual classified credits on the
basis of specific circumstances and assessments. The "margin for imprecision"
component is an unallocated portion that supplements the first two components as
a conservative margin to guard against unforeseen factors. The "historical
losses" and "specific" components include management's judgment of the effect of
current and forecasted economic conditions on the ability of the Company's
borrowers' to repay; an evaluation of the allowance for credit losses in
relation to the size of the overall loan portfolio; an evaluation of the
composition of, and growth trends within, the loan portfolio; consideration of
the relationship of the allowance for credit losses to nonperforming loans; net
charge-off trends; and other factors. While this evaluation process utilizes
historical and other objective information, the classification of loans and the
establishment of the allowance for credit losses, relies, to a great extent, on
the judgment and experience of management. The Company evaluates the adequacy of
its allowance for credit losses quarterly.

    The Bank had no impaired loans at December 31, 1997 and 1996. The recorded
investment in impaired loans at December 31, 1995 was comprised of one loan of
$343,000, which had a related allowance of $69,000. Such allowance is included
in the allowance for credit losses. The average recorded investment in impaired
loans was zero, $273,000 and $369,000 in 1997, 1996 and 1995, respectively. No
interest income was recognized on such loans during the period of impairment.

    The allowance for credit losses totaled $3,609,000 or 2.5% of total loans as
of December 31, 1997 compared to $3,158,000 or 2.6% as of December 31, 1996, and
$2,478,000 or 2.3% as of December 31, 1995. It is the policy of management to
maintain the allowance for possible credit losses at a level adequate for known
and future risks inherent in the loan portfolio. Based on information currently
available to analyze loan loss potential, including economic factors, overall
credit quality, historical delinquency and a history of actual charge-offs,
management believes that the loan loss provision and allowance are adequate;
however, no assurance of the ultimate level of credit losses can be given with
any certainty.

                                       20
<PAGE>
Loans are charged against the allowance when management believes that the
collectibility of the principal is unlikely. An analysis of activity in the
allowance for credit losses is presented in Table 7.

                      TABLE 7 ALLOWANCE FOR CREDIT LOSSES

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                              -----------------------------------------------------
                                                1997       1996       1995       1994       1993
                                              ---------  ---------  ---------  ---------  ---------
                                                             (DOLLARS IN THOUSANDS)
<S>                                           <C>        <C>        <C>        <C>        <C>
Total Loans Outstanding.....................  $ 146,427  $ 123,721  $ 106,840  $  97,648  $  92,488
Average Total Loans.........................    128,974    115,743     99,842     94,273     99,319
Allowance for Credit Losses:
Balance, January 1..........................  $   3,158  $   2,478  $   1,859  $   1,723  $   1,572
Charge-offs by Loan Category:
  Commercial................................        108        256        293        304        295
  Installment and other.....................         57         96        108         32         73
  Real Estate construction..................     --         --         --            120        400
  Real Estate-term..........................     --         --         --             30     --
                                              ---------  ---------  ---------  ---------  ---------
Total Charge-Offs...........................        165        352        401        486        768
Recoveries by Loan Category:
  Commercial................................        107         78         79         17         67
  Installment and other.....................         53          9         25          3          2
  Real Estate construction..................          6         45         16     --         --
  Real Estate-term..........................     --         --         --              2     --
                                              ---------  ---------  ---------  ---------  ---------
    Total Recoveries........................        166        132        120         22         69
Net Charge-Offs (Recoveries)................         (1)       220        281        464        699
Provision Charged to Expense................        450        900        900        600        850
                                              ---------  ---------  ---------  ---------  ---------
Balance, December 31........................  $   3,609  $   3,158  $   2,478  $   1,859  $   1,723
                                              ---------  ---------  ---------  ---------  ---------
                                              ---------  ---------  ---------  ---------  ---------
Ratios:
  Net Charge-offs to Average Loans..........       0.0%      0.19%      0.28%      0.49%      0.70%
  Reserve to Total Loans....................      2.46%      2.55%      2.32%      1.90%      1.86%
</TABLE>

    The allowance for credit losses is allocated based upon management's review
of credit quality and is presented in Table 8. This allocation should not be
interpreted as an indication of expected amounts or categories where losses will
occur.

             TABLE 8 ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                     ------------------------------------------------------------------------------------------------------------
                             1997                  1996                  1995                  1994                  1993
                     --------------------  --------------------  --------------------  --------------------  --------------------
                                 PERCENT               PERCENT               PERCENT               PERCENT               PERCENT
                                OF TOTAL              OF TOTAL              OF TOTAL              OF TOTAL              OF TOTAL
                      AMOUNT      LOANS     AMOUNT      LOANS     AMOUNT      LOANS     AMOUNT      LOANS     AMOUNT      LOANS
                     ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                                (DOLLARS IN THOUSANDS)
<S>                  <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Commercial.........  $   1,538      29.3%  $   1,658      28.8%  $   1,338      32.1%  $   1,051      33.1%  $   1,328      39.0%
Real estate........      1,793      66.5%      1,154      64.9%        991      60.4%        705      58.3%        378      52.7%
Installment and
  other............        278       4.2%        346       6.3%        149       7.5%        103       8.6%         17       8.3%
                     ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
                     $   3,609     100.0%  $   3,158     100.0%  $   2,478     100.0%  $   1,859     100.0%  $   1,723     100.0%
                     ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
                     ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

    The allocation for real estate includes real estate construction and real
estate term loans. Management has historically not allocated the allowance for
credit losses separately for real estate construction and real estate term
loans.

                                       21
<PAGE>
OTHER INTEREST EARNING ASSETS

    The average balance of securities and federal funds sold totaled $97,676,000
in 1997, an increase of $13,902,000 from $83,774,000 in 1996. The average
balance of securities and federal funds sold increased $16,527,000 to
$83,774,000 in 1996. The 1997 and 1996 increases resulted from deploying
additional liquidity in the securities portfolio. Sources of the additional
liquidity were borrowed funds and the excess of the increase in average deposits
over the increase in average loans. Management uses borrowed funds to increase
earning assets and enhance the Company's interest rate risk profile.

FUNDING

    Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and time
deposits under $100,000 generated from local businesses and individuals. These
sources represent relatively stable, long term deposit relationships which
minimize fluctuations in overall deposit balances. The Bank has never used
brokered deposits. Table 9 presents the composition of deposits for the five
years ended December 31, 1997.

                        TABLE 9 COMPOSITION OF DEPOSITS

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                            -----------------------------------------------------
                                              1997       1996       1995       1994       1993
                                            ---------  ---------  ---------  ---------  ---------
                                                           (DOLLARS IN THOUSANDS)
<S>                                         <C>        <C>        <C>        <C>        <C>
Demand, non-interest......................  $  66,812  $  56,699  $  49,575  $  43,112  $  31,278
Demand, interest..........................     76,123     69,305     74,944     77,380     70,060
Savings...................................     23,942     32,296     17,385     17,254     16,637
Time......................................     34,320     27,167     22,142     14,384     17,598
                                            ---------  ---------  ---------  ---------  ---------
Total.....................................  $ 201,197  $ 185,467  $ 164,046  $ 152,130  $ 135,573
                                            ---------  ---------  ---------  ---------  ---------
                                            ---------  ---------  ---------  ---------  ---------
</TABLE>

    Deposits increased $15,730,000 or 8% to $201,197,000 as of December 31, 1997
and $21,421,000 or 13% to $185,467,000 as of December 31, 1996 over 1996 and
1995, respectively. Average total deposits in 1997 of $193,260,000 showed an
increase of $22,168,000 or 13% over the same period in 1996 and in 1996 of
$171,092,000 showed an increase of $19,132,000 or 13% over 1995. During 1997,
average interest-bearing deposits increased $13,860,000 and average non-interest
bearing deposits increased $8,304,000 over 1996.

    Another source of funding for the Company is borrowed funds. Typically,
these funds result from the use of agreements to sell securities with repurchase
at a designated future date, also known as repurchase agreements. Repurchase
agreements are conducted with major banks and investment brokerage firms. The
maturity of these arrangements for the Bank is typically 30 to 90 days. The
average balance of borrowed funds was and $26,881,000 and $23,528,000 during
1997 and 1996, respectively. The increase in average borrowed funds reflects
management's intent to increase earning assets, prudently leverage capital and
minimize the Company's interest rate risk. The weighted average interest rate
for 1997 was 5.4% and for 1996 was 5.9%. The maximum amount of borrowings at any
month-end during 1997 was $28,879,000. The weighted average interest rate on
borrowed funds outstanding at December 31, 1997 and 1996 was 5.7% and 5.4%,
respectively.

LIQUIDITY AND INTEREST RATE SENSITIVITY

    Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit needs
and requirements of its clients. Both assets and liabilities contribute to the
Bank's liquidity position. Federal funds lines, short-term investments and
securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Bank assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. The Bank maintains informal lines of credit
with its correspondent banks for short-term

                                       22
<PAGE>
liquidity needs. These informal lines of credit are not committed facilities by
the correspondent banks and no fees are paid by the Bank to maintain them.

    The Bank manages its liquidity by maintaining a majority of its investment
portfolio in liquid investments in addition to its federal funds sold. Liquidity
is measured by various ratios, including the liquidity ratio of net liquid
assets compared to total assets. As of December 31, 1997, this ratio was 18.9%.
Other key liquidity ratios are the ratios of gross loans to deposits and federal
funds sold to deposits, which were 72.8% and 7.5%, respectively, as of December
31, 1997.

INTEREST RATE SENSITIVITY

    Interest rate sensitivity is a measure of the exposure of the Company's
future earnings due to changes in interest rates. If assets and liabilities do
not reprice simultaneously and in equal volumes, the potential for such exposure
exists. It is management's objective to achieve a modestly asset-sensitive
position, such that the net interest margin of the Company increases as market
interest rates rise and decreases when rates decline.

    One quantitative measure of the "mismatch" between asset and liability
repricing is the interest rate sensitivity "gap" analysis. All interest-earning
assets and funding sources are classified as to their expected repricing or
maturity date, whichever is sooner. Within each time period, the difference
between asset and liability balances, or "gap," is calculated. Positive
cumulative gaps in early time periods suggest that earnings will increase if
interest rates rise. Negative gaps suggest that earnings will decline when
interest rates rise. Table 10 presents the gap analyses for the Company at
December 31, 1997. Mortgage backed securities are reported in the period of
their expected repricing based upon estimated prepayments developed from recent
experience.

                       TABLE 10 INTEREST RATE SENSITIVITY

<TABLE>
<CAPTION>
                                                       NEXT DAY    OVER THREE
                                                      AND WITHIN   MONTHS AND    OVER ONE
                                                         THREE     WITHIN ONE   AND WITHIN    OVER FIVE
                                         IMMEDIATELY    MONTHS        YEAR      FIVE YEARS      YEARS       TOTAL
                                         -----------  -----------  -----------  -----------  -----------  ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                      <C>          <C>          <C>          <C>          <C>          <C>
As of December 31, 1997
Rate Sensitive Assets:
  Federal Funds Sold...................   $  15,000    $  --        $  --        $  --        $  --       $  15,000
Investment Securities:
  Treasury and Agency Obligations......      --           --            2,700        5,436                    8,136
  Mortgage-Backed Securities...........      --            2,515        6,939       25,685       28,761      63,900
  Municipal Securities.................      --              110          914        1,833        4,225       7,082
  Other................................      --           --           --           --            1,348       1,348
                                         -----------  -----------  -----------  -----------  -----------  ---------
Total Investment Securities............      --            2,625       10,553       32,954       34,334      80,466
Loans Excluding Nonaccrual Loans.......     131,884          476        2,505        5,997        5,299     146,161
                                         -----------  -----------  -----------  -----------  -----------  ---------
Total Rate Sensitive Assets............   $ 146,884    $   3,101    $  13,058    $  38,951    $  39,633   $ 241,627
                                         -----------  -----------  -----------  -----------  -----------  ---------
                                         -----------  -----------  -----------  -----------  -----------  ---------
Rate Sensitive Liabilities:
  Deposits:
    Demand and Savings.................   $ 100,065    $  --        $  --        $  --        $  --       $ 100,065
    Time...............................      --           18,843       12,773        2,704       --          34,320
                                         -----------  -----------  -----------  -----------  -----------  ---------
Total Interest-bearing Deposits........     100,065       18,843       12,773        2,704       --         134,385
Other Borrowings.......................      --           30,070       --           --           --          30,070
                                         -----------  -----------  -----------  -----------  -----------  ---------
  Total Rate Sensitive Liabilities.....   $ 100,065    $  48,913    $  12,773    $   2,704    $  --       $ 164,455
                                         -----------  -----------  -----------  -----------  -----------  ---------
                                         -----------  -----------  -----------  -----------  -----------  ---------
Gap....................................   $  46,819    $ (45,812)   $     285    $  36,247    $  39,633   $  77,172
Cumulative Gap.........................   $  46,819    $   1,007    $   1,292    $  37,539    $  77,172
</TABLE>

                                       23
<PAGE>
    The Company's positive cumulative total gap results from the exclusion from
the above table of noninterest-bearing demand deposits, which represent a
significant portion of the Company's funding sources. The Company maintains a
positive cumulative gap in all time periods. The Company's experience indicates
money market deposit rates tend to lag changes in the prime rate which
immediately impact the prime-based loan portfolio. Even in the Company's
negative gap time periods, rising rates tend to result in an increase in net
interest income. Should interest rates stabilize or decline in future periods,
it is reasonable to assume that the Company's net interest margin, as well as
net interest income, may decline correspondingly.

    Table 11 presents the contractual maturity distribution of investment
securities and the weighted average yields for each range of maturities. Yields
are presented on an actual basis.

                   TABLE 11 INVESTMENT MATURITY DISTRIBUTION
                               DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                          WEIGHTED                    WEIGHTED                    WEIGHTED
                               CARRYING      1 YEAR        AVERAGE      1 YEAR TO      AVERAGE     5 YEARS TO      AVERAGE
                                 VALUE       OR LESS        YIELD        5 YEARS        YIELD       10 YEARS        YIELD
                              -----------  -----------  -------------  -----------  -------------  -----------  -------------

<S>                           <C>          <C>          <C>            <C>          <C>            <C>          <C>
U.S. Treasury and Agency
  Obligations...............   $   8,136                                    6,931          6.58%    $   1,205          7.10%
Mortgage Backed
  Securities................      63,900                                      632          6.73%        1,197          7.29%
Obligations of State and
  Municipal Obligations.....       7,082    $     335          6.66%        1,443          6.67%        3,094          5.02%
Federal Home Loan Bank
  Stock.....................       1,348
                              -----------       -----                  -----------                 -----------
                               $  80,466    $     335                   $   9,006                   $   5,496
                              -----------       -----                  -----------                 -----------
                              -----------       -----                  -----------                 -----------

<CAPTION>
                                             WEIGHTED
                               MORE THAN      AVERAGE
                               10 YEARS        YIELD
                              -----------  -------------
<S>                           <C>          <C>
U.S. Treasury and Agency
  Obligations...............
Mortgage Backed
  Securities................   $  62,071          7.29%
Obligations of State and
  Municipal Obligations.....       2,210          5.28%
Federal Home Loan Bank
  Stock.....................       1,348
                              -----------
                               $  65,629
                              -----------
                              -----------
</TABLE>

    Table 12 presents the time remaining until maturity for certificates of
deposits in denominations of $100,000 or more as of December 31, 1997.

                        TABLE 12 CERTIFICATES OF DEPOSIT
                       DENOMINATIONS OF $100,000 OR MORE
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             DECEMBER 31, 1997
                                                                             -----------------
<S>                                                                          <C>
Time remaining until maturity:
Less than 3 months.........................................................      $  11,614
3 months to 6 months.......................................................          4,084
6 months to 12 months......................................................          2,441
More than 12 months........................................................            133
                                                                                   -------
    Total..................................................................      $  18,272
                                                                                   -------
                                                                                   -------
</TABLE>

                                       24
<PAGE>
    Loan maturities for commercial and real estate construction loans at
December 31, 1997, are presented in Table 13.

                            TABLE 13 LOAN MATURITIES

<TABLE>
<CAPTION>
                                                      AFTER ONE
                                                     BUT WITHIN     AFTER
                                        WITHIN ONE      FIVE        FIVE
                                           YEAR         YEARS       YEARS      TOTAL
                                        -----------  -----------  ---------  ---------
                                                    (DOLLARS IN THOUSANDS)
<S>                                     <C>          <C>          <C>        <C>
Commercial............................   $  26,397    $  10,029   $   6,412  $  42,838
Real estate construction..............      21,376       --          --         21,376
                                        -----------  -----------  ---------  ---------
    Total.............................   $  47,773    $  10,029   $   6,412  $  64,214
                                        -----------  -----------  ---------  ---------
                                        -----------  -----------  ---------  ---------
</TABLE>

    Commercial loans at December 31, 1997 maturing after one year are comprised
of fixed rate and variable rate loans as shown below:

<TABLE>
<CAPTION>
                                                    AFTER ONE     AFTER
                                                   BUT WITHIN     FIVE
                                                   FIVE YEARS     YEARS      TOTAL
                                                   -----------  ---------  ---------
                                                        (DOLLARS IN THOUSANDS)
<S>                                                <C>          <C>        <C>
Fixed rate.......................................   $     122   $  --      $     122
Variable rate....................................       9,907       6,412     16,319
                                                   -----------  ---------  ---------
                                                    $  10,029   $   6,412  $  16,441
                                                   -----------  ---------  ---------
                                                   -----------  ---------  ---------
</TABLE>

CAPITAL RESOURCES

    Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that the Company and the Bank are in
compliance with all regulatory capital guidelines. The primary source of new
capital for the Company has been the retention of earnings. Stockholders' equity
was $27,764,000 at December 31, 1997, an increase of $4,571,000, or 19.7% from
the $23,193,000 balance at December 31, 1996. This increase was due to 1997
earnings of $5,155,000, offset by cash dividends of $1,017,000, an increase in
the net after-tax unrealized gain on securities available-for-sale of $563,000,
and the repurchase of common stock of $130,000. The Company does not have any
material commitments for capital expenditures as of December 31, 1997.

    The Company pays a quarterly cash dividend on its common stock as part of
efforts to enhance stockholder value. The Company's goal is to maintain a strong
capital position that will permit payment of a consistent cash dividend which
grows commensurate with earnings growth.

    During 1995, the Board of Directors approved a stock repurchase program
authorizing open market purchases of up to 68,340 of the outstanding shares, or
approximately 3%, in order to enhance long term stockholder value. The 1995
repurchase program was completed during 1996 with 68,340 shares purchased for a
total purchase price of $952,000. In January 1997, the Company's directors
approved a plan to repurchase up to 3% of outstanding shares, or 66,290 shares,
from time to time in open market transactions. As of December 31, 1997, 6,000
shares had been acquired for a total purchase price of $130,000.

    The Company and the Bank are subject to capital adequacy guidelines issued
by the federal bank regulatory authorities. Under these guidelines, the minimum
total risk-based capital requirement is 10.0% of risk-weighted assets and
certain off-balance sheet items for a "well capitalized" depository institution.
At least 6.0% of the 10.0% total risk-based capital ratio must consist of Tier 1
capital, defined as tangible common equity, and the remainder may consist of
subordinated debt, cumulative preferred stock and a limited amount of the
allowance for loan losses.

                                       25
<PAGE>
    The federal regulatory authorities have established minimum capital leverage
ratio guidelines for state member banks. The ratio is determined using Tier 1
capital divided by quarterly average total assets. The guidelines require a
minimum of 5.0% for a "well capitalized" depository institution.

    The Company's risk-based capital ratios were in excess of regulatory
guidelines for a "well capitalized" depository institution as of December 31,
1997, 1996 and 1995. Capital ratios for the Company are set forth in Table 14:

                            TABLE 14 CAPITAL RATIOS

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                    -------------------------------
                                                                      1996       1995       1994
                                                                    ---------  ---------  ---------
<S>                                                                 <C>        <C>        <C>
Total risk-based capital ratio....................................       16.7%      16.4%      16.9%
Tier 1 risk-based capital ratio...................................       15.4%      15.2%      15.7%
Tier 1 leverage ratio.............................................       10.3%       9.8%      10.2%
</TABLE>

    Capital ratios for the Bank at December 31, 1997 and 1996 were 15.1% and
15.0% total risk-based capital ratio, 13.9% and 13.8% Tier 1 risk-based capital
ratio and 9.3% and 8.7% Tier 1 leverage ratio. Prior to July 25, 1995, the
Bank's ratios are the same as the Company's ratios.

EFFECTS OF INFLATION

    The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing, or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company indirectly through its effect of increasing market
rates of interest. However, the Company's earnings are affected by the spread
between the yield on earning assets and rates paid on interest-bearing
liabilities rather than the absolute level of interest rates. Additionally,
there may be some upward pressure on the Company's operating expenses, such as
adjustments in salaries and benefits and occupancy expense, based upon consumer
price indices. In the opinion of management, inflation has not had a material
effect on the consolidated financial statements for the years ended December 31,
1996, 1995 and 1994. Changes in interest rates are highly sensitive to many
factors which are beyond the control of management. Changes in interest rates
will influence the growth of loans, investments and deposits, as well as the
rates charged on loans and paid on deposits. The nature, timing and impact of
future changes in interest rates or monetary and fiscal policies are not
predictable.

YEAR 2000

    The approach of the year 2000 presents significant issues for many
financial, information and operational systems. Many systems in use today may
not be able to interpret dates after December 31, 1999 appropriately, because
such systems allow only two digits to indicate the year in a date. As a result,
such systems are unable to distinguish January 1, 2000 from January 1, 1900,
which could have adverse consequences on the operations of the entity and
integrity of information processing, causing safety, operational and financial
issues.

    The Company has adopted a plan to address the year 2000 issues. Actions
include a process of inventory, analysis, modification, testing and
certification, and implementation. Reviews of the Company's information systems
and information provided by the Company's primary vendors, large customers and
suppliers has not identified any year 2000 compliance issues which appear to be
unresolvable by December 31, 1999. In the event of year 2000 failure or
erroneous results, the Company could be adversely impacted in a number of ways.
Internal operations problems and problems resulting from primary vendors and
suppliers inability to perform could cause increased costs in determining
correct results and lost customers resulting in a loss of revenue. Large
customers negativley effected by year 2000 problems could lead to deposit
outflows or increased risk of collecting loans.

                                       26
<PAGE>
    The Company continues to evaluate its information systems to identify
systems which may not be compliant with the year 2000 and plan for appropriate
modifications. In addition to modifying existing systems, the Company may also
replace certain equipment and software to ensure year 2000 compliance. Amounts
expensed in 1997 were not significant to the Company's financial position or
results of operations. Although the remaining costs associated with achieving
year 2000 compliance have not yet been determined, management does not believe
the amounts expensed over the next two years will have a material effect on the
Company's financial position or results of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The information under Item 7 of this Report under the Caption "Interest Rate
Sensitivity" is incorporated herein by reference.

    The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on earning
assets, such as loans and securities, and its interest expense on
interest-bearing liabilities, such as deposits and borrowings. The Bank, like
other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank manages its mix of assets and liabilities with the goals
of limiting its exposure to interest rate risk, ensuring adequate liquidity, and
coordinating its sources and uses of funds. Specific strategies have included
increasing the volume of fixed rate securities funded in part by borrowings such
as repurchase agreements.

    The Bank seeks to control its interest rate risk exposure in a manner that
will allow for adequate levels of earnings and capital over a range of possible
interest rate environments. The Bank has adopted formal policies and practices
monitor and manage interest rate risk exposure. As part of this effort, the Bank
uses the market value of portfolio equity (MVPE) methodology to gauge interest
rate risk exposure.

    Generally, MVPE is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in MVPE which would result from a theoretical 200 basis point (1 basis
point equals .01%) change in market interest rates. Both 200 basis point
increases and decreases in market rates are considered.

    The following table, as of December 31, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in MVPE for instantaneous and
sustained parallel shifts of 200 basis points in market interest rates.

                            ESTIMATED CHANGE IN MVPE

<TABLE>
<CAPTION>
BASIS POINT (BP)
CHANGE IN RATES                                                             AMOUNT          %
-----------------------------------------------------------------------  -------------  ---------
<S>                                                                      <C>            <C>
+200...................................................................  $   1,972,000        5.4
   0...................................................................       --                0
-200...................................................................  $  (5,306,000)     (14.6)
</TABLE>

    The above table illustrates, for example, that an instantaneous 200 basis
point decrease in market interest rates at December 31, 1997 would reduce the
Bank's MVPE by approximately $5.3 million at that date.

    Management believes the MVPE methodology overcomes three shortcomings of the
typical maturity gap methodology. First, it does not use arbitrary repricing
intervals and accounts for all expected future cash flows; weighting each by its
appropriate discount factor. Second, because the MVPE method projects cash flows
of each financial instrument under different interest-rate environments, it can
incorporate the effect of embedded options on an institution's interest rate
risk exposure. Third, it allows interest rates on different instruments to
change by varying amounts in response to a change in market interest rates,
resulting in more accurate estimates of cash flows.

                                       27
<PAGE>
    However, as with any method of gauging interest rate risk, there are certain
shortcomings inherent to the MVPE methodology. The model assumes interest rate
changes are instantaneous parallel shifts in the yield curve. In reality, rate
changes are rarely instantaneous. The use of he simplifying assumption that
short-term and long-term rates change by the same degree may also misstate
historic rate patterns, which rarely show parallel yield curve shifts. Further,
the model assumes that certain assets and liabilities of similar maturity or
period to repricing will react the same to changes in rates. In reality, certain
types of financial instruments may react in advance of changes in market rates,
while the reaction of other types of financial instruments may lag behind the
change in general market rates. Additionally, the MVPE methodology may not
reflect the full impact of annual and life time restrictions on changes in rates
for certain assets, such as adjustable-rate mortgages. When interests rates
change, actual loan prepayments and actual early withdrawals from certificates
of deposit may deviate significantly from assumptions used in the model.
Finally, this methodology does not measure or reflect the impact that higher
rates may have on variable or adjustable-rate loan customers' ability to service
their debt. All of these factors are to be considered in monitoring the Bank's
exposure to interest rate risk.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Audited consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 appear on pages 29 thru 46.

                                       28
<PAGE>
                                 COAST BANCORP

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                   ------------------------------
                                                                                        1997            1996
                                                                                   --------------  --------------
<S>                                                                                <C>             <C>
                                                     ASSETS
Cash and due from banks..........................................................  $   15,853,000  $   22,492,000
Federal funds sold...............................................................      15,000,000      15,500,000
                                                                                   --------------  --------------
    Total cash and equivalents...................................................      30,853,000      37,992,000
Securities:
  Available-for-sale, at fair value..............................................      80,466,000      65,486,000
  Held-to-maturity, at amortized cost (fair value--1996 $6,021,000)..............        --             5,914,000
Loans:
  Commercial.....................................................................      42,838,000      35,633,000
  Real estate-term...............................................................      76,101,000      65,208,000
  Real estate-construction.......................................................      21,376,000      15,112,000
  Installment and other..........................................................       6,112,000       7,768,000
                                                                                   --------------  --------------
    Total loans..................................................................     146,427,000     123,721,000
  Unearned income................................................................      (2,349,000)     (1,742,000)
  Allowance for credit losses....................................................      (3,609,000)     (3,158,000)
                                                                                   --------------  --------------
Net loans........................................................................     140,469,000     118,821,000
Bank premises and equipment--net.................................................       2,045,000       2,131,000
Other real estate owned..........................................................         112,000         551,000
Accrued interest receivable and other assets.....................................       7,560,000       6,020,000
                                                                                   --------------  --------------
      TOTAL ASSETS...............................................................  $  261,505,000  $  236,915,000
                                                                                   --------------  --------------
                                                                                   --------------  --------------

                                      LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
  Noninterest-bearing demand.....................................................  $   66,812,000  $   56,699,000
  Interest-bearing demand........................................................      76,123,000      69,305,000
  Savings........................................................................      23,942,000      32,296,000
  Time...........................................................................      34,320,000      27,167,000
                                                                                   --------------  --------------
    Total deposits...............................................................     201,197,000     185,467,000
Other borrowings.................................................................      30,070,000      24,608,000
Accrued expenses and other liabilities...........................................       2,474,000       3,647,000
                                                                                   --------------  --------------
      Total liabilities..........................................................     233,741,000     213,722,000

STOCKHOLDERS' EQUITY:
Preferred stock--no par value; 10,000,000 shares authorized; no shares issued....        --              --
Common stock--no par value; 20,000,000 shares authorized; shares outstanding:
  2,203,659 in 1997 and 2,209,659 in 1996........................................      11,011,000      11,041,000
Net unrealized gain on securities available-for-sale.............................         693,000         130,000
Retained earnings................................................................      16,060,000      12,022,000
                                                                                   --------------  --------------
  Total stockholders' equity.....................................................      27,764,000      23,193,000
                                                                                   --------------  --------------
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................  $  261,505,000  $  236,915,000
                                                                                   --------------  --------------
                                                                                   --------------  --------------
</TABLE>

                 See notes to consolidated financial statements

                                       29
<PAGE>
                                 COAST BANCORP

                         CONSOLIDATED INCOME STATEMENTS

<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                                          ---------------------------------------------
                                              1997            1996            1995
                                          -------------   -------------   -------------
<S>                                       <C>             <C>             <C>
Interest income:
  Loans, including fees.................  $  14,383,000   $  12,845,000   $  11,804,000
Securities:
  Taxable...............................      4,721,000       4,235,000       3,284,000
  Nontaxable............................        331,000         336,000         360,000
Federal funds sold......................      1,244,000         832,000         671,000
                                          -------------   -------------   -------------
Total interest income...................     20,679,000      18,248,000      16,119,000
Interest expense:
  Deposits..............................      4,172,000       3,435,000       2,970,000
  Other borrowings......................      1,455,000       1,378,000         783,000
                                          -------------   -------------   -------------
Total interest expense..................      5,627,000       4,813,000       3,753,000
                                          -------------   -------------   -------------
Net interest income.....................     15,052,000      13,435,000      12,366,000
Provision for credit losses.............        450,000         900,000         900,000
                                          -------------   -------------   -------------
Net interest income after provision for
  credit losses.........................     14,602,000      12,535,000      11,466,000
Noninterest income:
  Customer service fees.................      1,998,000       1,808,000       1,527,000
  Gain from sale of loans...............      1,404,000       1,420,000         678,000
  Loan servicing fees...................      1,038,000         958,000         875,000
  Gains (losses) from sales of
    securities..........................        (10,000)        114,000         (48,000)
  Gain on sale of other real estate
    owned...............................       --                39,000          65,000
  Other.................................        630,000         559,000         461,000
                                          -------------   -------------   -------------
Total noninterest income................      5,060,000       4,898,000       3,558,000
Noninterest expenses:
  Salaries and benefits.................      5,692,000       5,249,000       5,009,000
  Equipment.............................      1,120,000       1,146,000       1,043,000
  Occupancy.............................        980,000         929,000         904,000
  Stationery and postage................        362,000         382,000         278,000
  Insurance.............................        200,000         143,000         280,000
  Legal fees............................         84,000          93,000         200,000
  Other.................................      2,568,000       2,597,000       2,141,000
                                          -------------   -------------   -------------
Total noninterest expenses..............     11,006,000      10,539,000       9,855,000
                                          -------------   -------------   -------------
Income before income taxes..............      8,656,000       6,894,000       5,169,000
Provision for income taxes..............      3,501,000       2,766,000       2,020,000
                                          -------------   -------------   -------------
Net income..............................  $   5,155,000   $   4,128,000   $   3,149,000
                                          -------------   -------------   -------------
                                          -------------   -------------   -------------
Earnings per share:
Basic...................................  $        2.34   $        1.86   $        1.38
                                          -------------   -------------   -------------
                                          -------------   -------------   -------------
Diluted.................................  $        2.30   $        1.85   $        1.38
                                          -------------   -------------   -------------
                                          -------------   -------------   -------------
</TABLE>

                 See notes to consolidated financial statements

                                       30
<PAGE>
                                 COAST BANCORP

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                                       NET
                                                                   INDEBTEDNESS     UNREALIZED
                                                                   OF EMPLOYEE    GAIN (LOSS) ON
                                               COMMON STOCK           STOCK         SECURITIES                      TOTAL
                                          -----------------------   OWNERSHIP       AVAILABLE-      RETAINED    STOCKHOLDERS'
                                            SHARES      AMOUNT         PLAN          FOR-SALE       EARNINGS       EQUITY
                                          ----------  -----------  ------------   --------------   -----------  -------------
<S>                                       <C>         <C>          <C>            <C>              <C>          <C>
Balances, January 1, 1995...............   2,277,999  $11,383,000   $(191,000)      $(544,000)     $ 7,062,000  $ 17,710,000
Cash dividends paid.....................                                                              (820,000)     (820,000)
Repayment of employee stock ownership
  plan loan.............................                              191,000                                        191,000
Net increase in value of available-
  for-sale securities, net of tax of
  $724,000..............................                                            1,016,000                      1,016,000
Repurchase of common stock..............     (20,100)    (101,000)                                    (161,000)     (262,000)
Net income..............................                                                             3,149,000     3,149,000
                                          ----------  -----------  ------------   --------------   -----------  -------------
Balances, December 31, 1995.............   2,257,899   11,282,000      --             472,000        9,230,000    20,984,000
Cash dividends paid.....................                                                              (887,000)     (887,000)
Net decrease in value of available-
  for-sale securities, net of tax of
  $243,000..............................                                             (342,000)                      (342,000)
Repurchase of common stock..............     (48,240)    (241,000)                                    (449,000)     (690,000)
Net income..............................                                                             4,128,000     4,128,000
                                          ----------  -----------  ------------   --------------   -----------  -------------
Balances, December 31, 1996.............   2,209,659   11,041,000      --             130,000       12,022,000    23,193,000
Cash dividends paid.....................                                                            (1,017,000)   (1,017,000)
Net increase in value of available-
  for-sale securites, net of tax of
  $400,000..............................                                              563,000                        563,000
Repurchase of common stock..............      (6,000)     (30,000)                                    (100,000)     (130,000)
Net income..............................                                                             5,155,000     5,155,000
                                          ----------  -----------  ------------   --------------   -----------  -------------
Balances December 31, 1997..............   2,203,659  $11,011,000   $  --           $ 693,000      $16,060,000  $ 27,764,000
                                          ----------  -----------  ------------   --------------   -----------  -------------
                                          ----------  -----------  ------------   --------------   -----------  -------------
</TABLE>

                 See notes to consolidated financial statements

                                       31
<PAGE>
                                 COAST BANCORP

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31,
                                                                   ----------------------------------------------
                                                                        1997            1996            1995
                                                                   --------------  --------------  --------------
<S>                                                                <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................  $    5,155,000  $    4,128,000  $    3,149,000
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Provision for credit losses....................................         450,000         900,000         900,000
  Depreciation and amortization..................................         (39,000)        (83,000)       (101,000)
  Gain on sale of bank premises and equipment....................        --               (53,000)        (78,000)
  (Gains) losses on securities transactions......................         (10,000)       (114,000)         48,000
  Deferred income taxes..........................................        (257,000)       (785,000)       (601,000)
  Proceeds from loan sales.......................................      48,255,000      38,497,000      20,835,000
  Origination of loans held for sale.............................     (52,827,000)    (41,925,000)    (24,283,000)
  Accrued interest receivable and other assets...................      (1,040,000)       (236,000)        363,000
  Accrued expenses and other liabilities.........................      (1,173,000)      1,009,000         808,000
  Increase in unearned income....................................       1,783,000       1,131,000         875,000
  Other--net.....................................................        (205,000)       --               178,000
                                                                   --------------  --------------  --------------
Net cash provided by operations..................................          92,000       2,469,000       2,093,000
                                                                   --------------  --------------  --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale.............       5,552,000      13,572,000       4,665,000
Proceeds from maturities of securities...........................      15,291,000      17,047,000       9,723,000
Purchases of securities available-for-sale.......................     (29,236,000)    (31,733,000)    (42,140,000)
Net increase in loans............................................     (18,133,000)    (14,259,000)     (6,025,000)
Purchases of bank premises and equipment.........................        (750,000)       (430,000)       (418,000)
Proceeds from disposals of bank premises and equipment...........        --                14,000          26,000
Proceeds from sales of other real estate owned...................        --               904,000         475,000
                                                                   --------------  --------------  --------------
Net cash used in investing activities............................     (27,276,000)    (14,885,000)    (33,694,000)
                                                                   --------------  --------------  --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.........................................      15,730,000      21,421,000      11,916,000
Net proceeds from other borrowings...............................       5,462,000       4,608,000      16,000,000
Payment of cash dividends........................................      (1,017,000)       (887,000)       (820,000)
Repurchase of common stock.......................................        (130,000)       (690,000)       (262,000)
                                                                   --------------  --------------  --------------
Net cash provided by financing activities........................      20,045,000      24,452,000      26,834,000
                                                                   --------------  --------------  --------------
Net increase (decrease) in cash and equivalents..................      (7,139,000)     12,036,000      (4,767,000)
Cash and equivalents, beginning of year..........................      37,992,000      25,956,000      30,723,000
                                                                   --------------  --------------  --------------
Cash and equivalents, end of year................................  $   30,853,000  $   37,992,000  $   25,956,000
                                                                   --------------  --------------  --------------
                                                                   --------------  --------------  --------------
SUPPLEMENTAL CASH FLOW INFORMATION--CASH PAID DURING THE YEAR
  FOR:
Interest.........................................................  $    5,362,000  $    5,683,000  $    3,351,000
Income taxes.....................................................       3,675,000       3,867,000       2,393,000

NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Additions to other real estate owned.............................  $           --  $      586,000  $           --
</TABLE>

                 See notes to consolidated financial statements

                                       32
<PAGE>
                                 COAST BANCORP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

    ORGANIZATION--In May 1995, the stockholders of Coast Commercial Bank (the
Bank) approved a plan which provided for the formation of Coast Bancorp (a bank
holding company) (the Company) and the conversion of each share of outstanding
Bank common stock into one share of Company common stock. Effective July 25,
1995 the Company issued 2,277,999 shares of its common stock for all the
outstanding shares of the Bank through a merger which has been accounted for
similar to a pooling of interests in that the historical cost basis of the Bank
has been carried forward. As a result of the merger, the Bank became a
wholly-owned subsidiary of the Company.

    NATURE OF OPERATIONS--The Company and its subsidiary, Coast Commercial Bank,
operate 5 branches in Santa Cruz County, California. The Company's primary
source of revenue is loans to customers, who are predominately small and
middle-market businesses, professionals and middle-income individuals.

    BASIS OF PRESENTATION--The accounting and reporting policies of the Company
and the Bank conform to generally accepted accounting principles and to
prevailing practices within the banking industry. The methods of applying those
principles which materially affect the consolidated financial statements are
summarized below. In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, as of the dates of the balance
sheets, and revenues and expenses for the periods indicated. The allowance for
credit losses is a material estimate. Actual results could differ from those
estimates.

    CONSOLIDATION--The consolidated financial statements include the accounts of
the Company and the Bank. All material intercompany accounts and transactions
have been eliminated.

    CASH AND CASH EQUIVALENTS--For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are sold for one-day periods.

    SECURITIES--At the time of purchase, investments in debt and equity
securities are classified as held-to-maturity and measured at amortized cost
only if the Company has the positive intent and ability to hold such securities
to maturity. All other investments in debt and equity securities are classified
as available-for-sale, which are carried at market value with a corresponding
recognition of the unrealized holding gain or loss, net of income taxes, as a
net amount in a separate component of stockholders' equity until realized.

    Amortization of premiums and accretion of discounts arising at acquisition
of securities are included in income using methods that approximate the interest
method. Market values are based on quoted market prices or dealer quotes. Gains
or losses on the sale of securities are computed using the specific
identification method.

    LOANS--Loans are stated at principal amount outstanding. Loans held for sale
are carried at the lower of cost or market. Interest on loans is credited to
income as earned.

    The accrual of interest is discontinued and any accrued and unpaid interest
is reversed when the payment of principal or interest is 90 days past due unless
the amount is well secured and in the process of collection. Income on
nonaccrual loans is then recognized only to the extent that cash is received and
where the future collection of principal is probable.

    The Bank measures impaired loans based upon the present value of expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, an impairment may be

                                       33
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
measured based on a loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when, based
upon current information and events, it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the loan
agreement.

    Loan origination fees and costs are deferred and amortized to income by a
method approximating the effective interest method over the estimated lives of
the underlying loans. Fees received by the Company relating to mortgage loans
held for sale are recognized when the loans are sold.

    The Company originates loans that are guaranteed in part by the Small
Business Administration (SBA). The guaranteed portion of such loans can be sold
without recourse. The Company retains the servicing for the portion sold and has
credit risk for the remaining unguaranteed portion. Gains or losses realized on
loans sold are determined by allocating the recorded investment between the
portion of the loan sold and the portion retained based on an estimate of the
relative fair values of those portions as of the date the loan is sold.

    The Company also originates and sells residential mortgage loans to the
Federal Home Loan Mortgage Corporation (FHLMC) and other participants in the
mortgage markets.

    ALLOWANCE FOR CREDIT LOSSES--The allowance for credit losses is established
through a provision charged to expense. Loans are charged against the allowance
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
losses inherent in existing loans and commitments to extend credit, based on
evaluations of collectibility and prior loan loss experience. The evaluations
take into consideration factors such as changes in the composition of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, and current and anticipated local economic conditions that may affect the
borrowers' ability to pay.

    In evaluating the probability of collection, management is required to make
estimates and assumptions that affect the reported amounts of loans, allowance
for credit losses and the provision for credit losses charged to operations.
Actual results could differ significantly from those estimates.

    BANK PREMISES AND EQUIPMENT--Bank premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of three
to twenty years. The Company evaluates the recoverability of long-lived assets
on an ongoing basis.

    OTHER REAL ESTATE OWNED--Other real estate owned consists of property
acquired as a result of a foreclosure proceeding or through receipt of a
deed-in-lieu of foreclosure. Other real estate owned is carried at the lower of
cost or fair value less estimated costs to sell. Any excess of the loan balance
over the fair value when the property is acquired is charged to the allowance
for credit losses. Subsequent declines in fair value, if any, and disposition
gains and losses are included in noninterest income and noninterest expenses.

    ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS--Accrued interest receivable
and other assets includes the cash surrender value of single premium insurance
policies of $2,459,000 and $2,350,000 at December 31, 1997 and 1996,
respectively.

    ACCOUNTING FOR FINANCIAL ASSETS AND LIABILITIES--In June, 1996, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for

                                       34
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
which is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. In December
1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" to defer for one year the effective date
of implementation for transactions related to repurchase agreements, dollar-roll
repurchase agreements, securities lending and other similar transactions. The
Company adopted the applicable provisions of SFAS No. 125 effective January 1,
1997. The adoption of SFAS No. 125 did not have a significant impact on the
financial condition and results of operations of the Company. The Company
believes the effect of adoption of SFAS No. 127 will not have a significant
effect on the financial condition and results of operations of the Company.

    INCOME TAXES--Income taxes are provided at current rates. Deferred income
taxes are reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
amounts used for income tax purposes.

    STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees."

    NET INCOME PER SHARE--During the fourths quarter of 1997 the Company adopted
SFAS No. 128, "Earnings Per Share" and, retroactively, restated the net income
per share for 1996 and 1995. SFAS No. 128 requires presentation of basic and
diluted net income per share. Basic net income per share is computed by dividing
net income by the number of weighted average common shares outstanding. Diluted
net incme per share reflects potential dilution from outstanding stock options,
using the treasury stock method. The number of weighted average shares used in
computing basic and diluted net income per share are as follows:

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,
                                                                             ----------------------------------
                                                                                1997        1996        1995
                                                                             ----------  ----------  ----------
<S>                                                                          <C>         <C>         <C>
Basic......................................................................   2,205,799   2,218,437   2,277,567
Dilutive effect of stock options, using the treasury stock method..........      35,743      17,697       2,718
                                                                             ----------  ----------  ----------
Diluted....................................................................   2,241,542   2,236,134   2,280,285
                                                                             ----------  ----------  ----------
                                                                             ----------  ----------  ----------
</TABLE>

    RECLASSIFICATIONS--Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform to the 1997 presentation. These
reclassifications had no impact on stockholders' equity or net income.

    NEW ACCOUNTING PRONOUNCEMENTS--In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Company's 1998 consolidated financial
statements. The adoption of these statements will not have a significant impact
on the Company's financial position or results of operations.

                                       35
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

2. RESTRICTED CASH BALANCES

    The Company, through its bank subsidiary, is required to maintain reserves
with the Federal Reserve Bank of San Francisco. Reserve requirements are based
on a percentage of certain deposits. At December 31, 1997 the Company maintained
reserves of $5,748,000 in the form of vault cash and balances at the Federal
Reserve which satisfied the regulatory requirements.

3. SECURITIES

    The amortized cost and estimated fair values of securities at December 31,
are as follows:

<TABLE>
<CAPTION>
                                                                            GROSS         GROSS
                                                            AMORTIZED     UNREALIZED   UNREALIZED     ESTIMATED
                                                              COST           GAIN         LOSS       FAIR VALUE
                                                          -------------  ------------  -----------  -------------
<S>                                                       <C>            <C>           <C>          <C>
DECEMBER 31, 1997
Available-for-sale:
  U.S. Treasury and agency securities...................  $   8,098,000  $     38,000  $   --       $   8,136,000
  Mortgage-backed securities............................     62,918,000     1,026,000      (44,000)    63,900,000
  State and municipal obligations.......................  $   6,916,000  $    166,000               $   7,082,000
Other...................................................      1,348,000       --           --           1,348,000
                                                          -------------  ------------  -----------  -------------
Total...................................................  $  79,280,000  $  1,230,000  $   (44,000) $  80,466,000
                                                          -------------  ------------  -----------  -------------
                                                          -------------  ------------  -----------  -------------
DECEMBER 31, 1996
Available-for-sale:
  U.S. Treasury and agency securities...................  $   5,960,000  $     12,000  $    (9,000) $   5,963,000
  Mortgage-backed securities............................     58,028,000       467,000     (247,000)    58,248,000
  Other.................................................      1,275,000       --           --           1,275,000
                                                          -------------  ------------  -----------  -------------
Total...................................................  $  65,263,000  $    479,000  $  (256,000) $  65,486,000
                                                          -------------  ------------  -----------  -------------
                                                          -------------  ------------  -----------  -------------
Held-to-maturity--State and municipal Obligations.......  $   5,914,000  $    128,000  $   (21,000) $   6,021,000
                                                          -------------  ------------  -----------  -------------
                                                          -------------  ------------  -----------  -------------
</TABLE>

    The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are presented below. Mortgate-backed
securities generally have stated maturities from 5 to 30 years, but are subject
to substantial prepayments which effectively accelerate maturities.

<TABLE>
<CAPTION>
                                                                                          AVAILABLE-FOR-SALE
                                                                                     ----------------------------
                                                                                       AMORTIZED      ESTIMATED
                                                                                         COST        FAIR VALUE
                                                                                     -------------  -------------
<S>                                                                                  <C>            <C>
DECEMBER 31, 1997
U.S. Treasury and agency and state and municipal securities:
Due within one year................................................................  $     330,000  $     335,000
Due after 1 year through 5 years...................................................      8,284,000      8,374,000
Due after 5 years through 10 years.................................................      4,212,000      4,299,000
Due after 10 years.................................................................      2,188,000      2,210,000
                                                                                     -------------  -------------
                                                                                        15,014,000     15,218,000
Mortgage-backed securities.........................................................     62,918,000     63,900,000
                                                                                     -------------  -------------
Total..............................................................................  $  77,932,000  $  79,118,000
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>

                                       36
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

3. SECURITIES (CONTINUED)
    Gross realized gains and gross realized losses from sales of securities
available-for-sale were $43,000 and $53,000 in 1997, respectively, $283,000 and
$169,000 in 1996, respectively, and $10,000 and $58,000 in 1995, respectively.

    Effective December 31, 1997, state and municipal obligations with an
amortized cost of $5,744,000 and an unrealized gain of $166,000 were
reclassified from held-to-maturity to available-for-sale consistent with the
Company's decision to include all state and municipal obligations in its
interest rate risk management activities.

    At December 31, 1997, investment securities with a carrying value of
$48,876,000 were pledged to collateralize public deposits and for other purposes
as required by law or contract.

4. ALLOWANCE FOR CREDIT LOSSES

    Changes in the allowance for credit losses are as follows:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                      ----------------------------------------
                                                          1997          1996          1995
                                                      ------------  ------------  ------------
<S>                                                   <C>           <C>           <C>
Balance, beginning of period........................  $  3,158,000  $  2,478,000  $  1,859,000
Provision charged to expense........................       450,000       900,000       900,000
Loans charged off...................................      (165,000)     (352,000)     (401,000)
Recoveries..........................................       166,000       132,000       120,000
                                                      ------------  ------------  ------------
Balance, end of period..............................  $  3,609,000  $  3,158,000  $  2,478,000
                                                      ------------  ------------  ------------
                                                      ------------  ------------  ------------
</TABLE>

    Nonaccrual loans were $266,000, $159,000 and $824,000 at December 31, 1997,
1996, and 1995, respectively.

    There were no impaired loans at December 31, 1997 and 1996. The recorded
investment in impaired loans at December 31, 1995 was comprised of one loan of
$343,000, which had a related allowance of $69,000. Such allowance is a portion
of the allowance for credit losses. The average recorded investment in impaired
loans was $273,000 and $369,000 for 1996 and 1995, respectively. No interest
income was recognized during the period of impairment.

    Sales of SBA loans totaled $13,431,000, $15,472,000 and $6,915,000 in 1997,
1996 and 1995, respectively. SBA loans serviced for other investors were
$82,169,000 and $79,585,000 at December 31, 1997 and 1996, respectively. Sales
of residential mortgage loans totaled $34,824,000, $23,025,000, and $13,920,000
in 1997, 1996, and 1995, respectively. Residential mortgage loans serviced for
other investors were $45,912,000 and $43,038,000 at December 31, 1997 and 1996,
respectively.

    At December 31, 1997, SBA loans held for sale were $9,895,000 (1996,
$5,389,000). Mortgage loans held by the Company pending completion of their sale
to the FHLMC or other investors were $2,470,000 and $2,405,000 at December 31,
1997 and 1996, respectively. The Company does not anticipate any loss on the
sale of these loans. Loans held for or pending completion of sale are included
in loans in the consolidated balance sheets and are carried at cost, which is
lower than market value.

                                       37
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

5. BANK PREMISES AND EQUIPMENT

    Bank premises and equipment at December 31 are comprised of the following:

<TABLE>
<CAPTION>
                                                                      1997           1996
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Buildings and leasehold improvements............................  $   2,328,000  $   2,328,000
Furniture and equipment.........................................      5,445,000      4,717,000
                                                                  -------------  -------------
Total...........................................................      7,773,000      7,045,000
Accumulated depreciation and amortization.......................     (5,728,000)    (4,914,000)
                                                                  -------------  -------------
Bank premises and equipment--net................................  $   2,045,000  $   2,131,000
                                                                  -------------  -------------
                                                                  -------------  -------------
</TABLE>

    Certain of the Company's premises are leased under various noncancelable
operating leases expiring in 2002 which have, in certain instances, renewal
options. Future minimum lease payments are as follows:

<TABLE>
<S>                                       <C>
1998....................................  $     645,000
1999....................................        525,000
2000....................................        424,000
2001....................................        251,000
2002....................................         76,000
                                          -------------
Total...................................  $   1,921,000
                                          -------------
                                          -------------
</TABLE>

    Rent expense under operating leases was $652,000, $637,000 and $602,000 in
1997, 1996 and 1995, respectively.

6. INCOME TAXES

    The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                      ----------------------------------------
                                                          1997          1996          1995
                                                      ------------  ------------  ------------
<S>                                                   <C>           <C>           <C>
Current:
  Federal...........................................  $  2,832,000  $  2,609,000  $  1,895,000
  State.............................................       926,000       942,000       726,000
                                                      ------------  ------------  ------------
    Total current...................................     3,758,000     3,551,000     2,621,000
Deferred:
  Federal...........................................      (228,000)     (601,000)     (471,000)
  State.............................................       (29,000)     (184,000)     (130,000)
                                                      ------------  ------------  ------------
    Total deferred..................................      (257,000)     (785,000)     (601,000)
                                                      ------------  ------------  ------------
    Total...........................................  $  3,501,000  $  2,766,000  $  2,020,000
                                                      ------------  ------------  ------------
                                                      ------------  ------------  ------------
</TABLE>

                                       38
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

    The effective tax rate differs from the federal statutory rate as follows:

<TABLE>
<CAPTION>
                                                                         1997       1996       1995
                                                                       ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>
Statutory federal income tax rate....................................       35.0%      35.0%      35.0%
State income taxes, net of federal tax effect........................        6.8        7.2        7.6
Tax exempt income....................................................       (1.2)      (1.5)      (2.2)
Other--net...........................................................       (0.2)      (0.6)      (1.3)
                                                                             ---        ---        ---
    Total............................................................       40.4%      40.1%      39.1%
                                                                             ---        ---        ---
                                                                             ---        ---        ---
</TABLE>

    The Company's net deferred tax assets at December 31, are comprised of the
following:

<TABLE>
<CAPTION>
                                                                        1997          1996
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Deferred tax assets:
Provision for credit losses.......................................  $  1,405,000  $  1,056,000
Accelerated depreciation..........................................       427,000       450,000
Deferred compensation.............................................       398,000       102,000
Unrealized gains on loans held for sale...........................       197,000       --
State income tax..................................................       183,000       314,000
Provision for other real estate owned.............................        29,000       107,000
Other.............................................................        34,000        60,000
                                                                    ------------  ------------
    Total deferred tax assets.....................................     2,673,000     2,189,000
Deferred tax liabilities:
  Unrealized gains on securities available-for sale...............      (493,000)      (93,000)
  Real estate investment..........................................      (228,000)      --
                                                                    ------------  ------------
    Total deferred tax liabilities................................       721,000       (93,000)
                                                                    ------------  ------------
    Net deferred tax assets.......................................  $  1,952,000  $  2,096,000
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>

    There was no valuation allowance at December 31, 1997 and 1996.

7. DEPOSITS

    The aggregate amount of time deposits each with a minimum denomination of
$100,000 or more was $18,172,000 and $12,547,000 at December 31, 1997 and 1996,
respectively. At December 31, 1997, the scheduled maturities of time deposits
are as follows:

<TABLE>
<S>                                       <C>
1998....................................  $  32,772,000
1999....................................      1,548,000
                                          -------------
                                          $  34,320,000
                                          -------------
                                          -------------
</TABLE>

                                       39
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

8. OTHER BORROWINGS

    Other borrowings consist primarily of securities sold under agreements to
repurchase. Information concerning securities sold under agreements to
repurchase is summarized as follows:

<TABLE>
<CAPTION>
                                               1997             1996
                                          --------------   --------------
<S>                                       <C>              <C>
Average balance during the year.........  $   25,716,000   $   23,528,000
Average interest rate during the year...            5.4%             5.9%
Maximum month-end balance during the
  year..................................  $   28,879,000   $   24,707,000
Average rate at December 31.............            5.7%             5.4%
</TABLE>

    Mortgage-backed securities were delivered to the broker-dealers who arranged
the transactions to secure the agreements (See Note 3). The agreements at
December 31, 1997 mature within three months.

9. COMMITMENTS AND CONTINGENT LIABILITIES

    In the normal course of business, there are outstanding various commitments
and contingent liabilities which are not reflected in the consolidated financial
sstatements. The Company does not anticipate losses as a result of these
commitments. Undisbursed loan commitments totaled $59,088,000 and standby
letters of credit were $4,631,000 at December 31, 1997. The Company's exposure
to credit lsoss is limited to amounts funded or drawn.

    Loss commitments are typically contingent upon the borrower meeting certain
financial and other covenants and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments are
expected to expire without being drawn upon, the total commitments do not
necessarily represent future cash requirements. The Company evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits or business or
personal assets.

    Standby letters of credit are conditional commitments written by the Company
to guarantee the performance of a customer to a third party. These guarantees
are issued primarily relating to inventory purchases by the Company's commercial
customers and such guarantees are typically short-term. Credit risk is similar
to that involved in extending loan commitments to customers and the Company,
accordingly, uses evaluation and collateral requirements similar to those for
loan commitments. Virtually all of such commitments are collateralized.

10. LOAN CONCENTRATIONS

    The Bank's customers are primarily located in Santa Cruz, Monterey and San
Benito counties, an area on the California coast south of San Francisco.
Commercial loans represent 29% of total loans at December 31, 1997, with no
particular industry representing a significant portion. Approximately 15% of the
Company's loans at December 31, 1997 are for real estate construction including
single family residential and commercial properties. Other real estate secured
loans, primarily for commercial properties, represent another 52% of loans at
December 31, 1997. Installment and other loans, primarily automobile and mobile
home loans, represent the remainder of loans. Many of the Company's customers
are employed by or are otherwise dependent on the high technology, tourism,
agriculture and real estate development industries and, accordingly, the ability
of any of the Company's borrowers to repay loans may be affected by the
performance of these sectors of the economy. Virtually all loans are
collateralized. Generally, real estate loans are secured by real property and
commercial and other loans are secured by

                                       40
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

10. LOAN CONCENTRATIONS (CONTINUED)
bank deposits or business or personal assets. Repayment is generally expected
from refinancing or sale of the related property for real estate construction
loans and from cash flows of the borrower for other loans.

11. RELATED PARTY LOANS

    The Bank may make loans to directors and their associates subject to
approval by the Board of Directors. These transactions are at terms and rates
comparable to those granted to other customers of the Company. Loans to related
parties were $95,000 and $144,000 at December 31, 1997 and 1996, respectively.

12. REGULATORY MATTERS

    The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.

    Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and Bank meet all capital adequacy requirements to which
they are subject.

    As of December 31, 1997 and 1996, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized the Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.

                                       41
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

12. REGULATORY MATTERS (CONTINUED)
    The Company's and Bank's actual capital amounts and ratios are as follows:

<TABLE>
<CAPTION>
                                                                                    TO BE CATEGORIZED
                                                                                         AS WELL
                                                                  MINIMUM FOR       CAPITALIZED UNDER
                                                                CAPITAL ADEQUACY    PROMPT CORRECTIVE
                                                ACTUAL             PURPOSES:        ACTION PROVISIONS:
                                          ------------------   ------------------   ------------------
                                            AMOUNT     RATIO     AMOUNT     RATIO     AMOUNT     RATIO
                                          -----------  -----   -----------  -----   -----------  -----
<S>                                       <C>          <C>     <C>          <C>     <C>          <C>
THE COMPANY:
As of December 31, 1997:
Total Capital (to Risk Weighted
 Assets)................................  $28,883,000  16.7%   $13,859,000   8.0%           N/A   N/A
Tier I Capital (to Risk Weighted
 Assets)................................  $26,700,000  15.4%   $ 6,929,000   4.0%           N/A   N/A
Tier I Capital (to Average Assets)......  $26,700,000  10.3%   $10,357,000   4.0%           N/A   N/A

As of December 31, 1996:
Total Capital (to Risk Weighted
 Assets)................................  $24,944,000  16.4%   $12,144,000   8.0%           N/A   N/A
Tier I Capital (to Risk Weighted
 Assets)................................  $23,031,000  15.2%   $ 6,072,000   4.0%           N/A   N/A
Tier I Capital (to Average Assets)......  $23,031,000   9.8%   $ 9,415,000   4.0%           N/A   N/A

THE BANK:
As of December 31, 1997:
Total Capital (to Risk Weighted
 Assets)................................  $26,217,000  15.1%   $13,858,000   8.0%   $17,323,000  10.0%
Tier I Capital (to Risk Weighted
 Assets)................................  $24,034,000  13.9%   $ 6,929,000   4.0%   $10,394,000   6.0%
Tier I Capital (to Average Assets)......  $24,034,000   9.3%   $10,357,000   4.0%   $12,946,000   5.0%

As of December 31, 1996:
Total Capital (to Risk Weighted
 Assets)................................  $22,232,000  15.0%   $11,826,000   8.0%   $14,783,000  10.0%
Tier I Capital (to Risk Weighted
 Assets)................................  $20,368,000  13.8%   $ 5,913,000   4.0%   $ 8,870,000   6.0%
Tier I Capital (to Average Assets)......  $20,368,000   8.7%   $ 9,415,000   4.0%   $11,768,000   5.0%
</TABLE>

13. EMPLOYEE BENEFIT PLANS

    The Company has a 401(k) tax-deferred savings plan under which eligible
employees may elect to have a portion of their salary deferred and contributed
to the plan. The Company is not obligated to, but may contribute to the plan. In
1997, the Company matched each employee's contribution up to $500, aggregating
$42,000 ($42,000 in 1996 and 1995). Participants may elect several investment
options, including investment in the Company's common stock.

    Substantially all employees with at least 1,000 hours of service are covered
by a discretionary employee stock ownership plan (ESOP). The ESOP borrowed
$698,000 during 1991 and 1992 to purchase 82,985 shares of the Company's common
stock at fair market value from certain directors. During 1995 the loan was
fully repaid. The loan had been recorded as a liability of the Company with a
corresponding reduction to stockholders' equity. The ESOP serviced the loan with
contributions from the Company and with proceeds from sale of stock to 401(k)
plan participants. The Company's contribution to the ESOP was $120,000 in 1997,
1996 and 1995.

    The Bank has an unfunded salary continuation plan for two officers which
provides for retirement benefits upon reaching age 65. The Bank accrues such
post-retirement benefits over the vesting period of ten years. In the event of a
change in control of the Company, the officers' benefits will fully vest. The
Bank accrued $72,000, $120,000 and $146,000 in 1997, 1996, and 1995,
respectively. The liability under the salary continuation plan was $414,000 and
$342,000 at December 31, 1997 and 1996, respectively. The discount rate used to
measure the liability was 6.95% at December 31, 1997 and 1996.

                                       42
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

13. EMPLOYEE BENEFIT PLANS (CONTINUED)
    The Bank has a deferred compensation plan whereby certain directors defer
their fees until age 65 or 70. Amounts deferred accrue interest at a rate
determined annually by the Board of Directors (7.7% and 6.6% for 1997 and 1996,
respectively). Accumulated benefits are paid over 8 to 13 years. Total deferred
director fees at December 31, 1997 and 1996 were $448,000 and $341,000,
respectively.

    Under the 1995 stock option plan (Plan) the Company may grant options to
purchase up to 400,000 shares of common stock to employees, directors and
consultants at prices not less than the fair market value at date of grant.
Employee options generally expire 5 to 10 years from the date of grant and vest
over a 5-year period. Under the Plan non-employee directors of the Company are
automatically granted options to purchase 2,000 shares of common stock at the
fair market value at the date of grant each year that such person remains a
director of the Company. Options granted under the Plan to non-employee
directors are exercisable after 6 months and expire from 5 years from the date
of grant. The maximum number of shares which may be issued to an individual
non-employee director under the Plan is 10,000.

    Option activity under the plan is as follows:

<TABLE>
<CAPTION>
                                                                                       WEIGHTED
                                                                                        AVERAGE
                                                                          NUMBER OF    EXERCISE
                                                                           SHARES        PRICE
                                                                         -----------  -----------
<S>                                                                      <C>          <C>
Outstanding, January 1, 1995...........................................      --        $  --
Granted (weighted average fair value of $8.56).........................      14,000        10.25
                                                                         -----------  -----------
Outstanding, December 31, 1995 (14,000 exercisable at a weighted
  average price of $10.25).............................................      14,000        10.25
Granted (weighted average fair value of $5.29).........................      64,000        14.25
                                                                         -----------  -----------
Outstanding, December 31, 1996 (28,000 exercisable at a weighted
  average price of $12.19).............................................      78,000        13.53
Granted (weighted average fair value of $14.94)........................      44,000        23.83
                                                                         -----------  -----------
Outstanding, December 31, 1997.........................................     122,000    $   17.24
                                                                         -----------  -----------
                                                                         -----------  -----------
</TABLE>

    Additional information regarding options outstanding as of December 31, 1997
is as follows:

<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING
                -------------------------------------------------------       OPTIONS EXERCISABLE
   RANGE OF                     WEIGHTED AVERAGE                         ------------------------------
   EXERCISE       NUMBER      REMAINING CONTRACTUAL   WEIGHTED AVERAGE     NUMBER     WEIGHTED AVERAGE
    PRICES      OUTSTANDING        LIFE (YRS)          EXERCISE PRICE    EXERCISABLE   EXERCISE PRICE
--------------  -----------  -----------------------  -----------------  -----------  -----------------
<S>             <C>          <C>                      <C>                <C>          <C>
    $10.25          14,000               3.1              $   10.25          14,000       $   10.25
     14.25          64,000               7.3                  14.25          24,000           14.25
     22.38          14,000               4.2                  22.38          14,000       $   22.38
     24.50          30,000               9.21                 24.50          --              --
                -----------                                              -----------
                   122,000                                $   17.24          52,000       $   15.36
                -----------                                              -----------
                -----------                                              -----------
</TABLE>

    At December 31, 1997, 278,000 shares were available for future grants under
the option plan.

    As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to

                                       43
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

13. EMPLOYEE BENEFIT PLANS (CONTINUED)
Employees" and its related interpretations. Accordingly, no compensation expense
has been recognized in the financial statements for employee stock arrangements.

    SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
101 months in 1997, 102 months in 1996 and 60 months in 1995 following grant;
stock volatility, 50% in 1997, 1996 and 1995; risk free interest rates, 6.55% in
1997, 6.25% in 1996 and 7.34% in 1995; and 24% dividends during the expected
term. The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of the
1995, 1996 and 1997 awards had been amortized to expense over the vesting period
of the awards, pro forma net income would have been as follows:

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                              ----------------------------------------
                                                                  1997          1996          1995
                                                              ------------  ------------  ------------
<S>                                                           <C>           <C>           <C>
Proforma net income.........................................  $  4,978,000  $  4,026,000  $  3,105,000
Proforma net income per share:
  Basic.....................................................  $       2.26  $       1.80  $       1.36
  Diluted...................................................  $       2.22  $       1.77  $       1.36
</TABLE>

14. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS

    The estimated fair value amounts have been determined by using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions and/or estimation techniques
may have a material effect on the estimated fair value amounts.

    The following table presents the carrying amount and estimated fair value of
certain assets and liabilities held by the Company at December 31, 1997 and
1996. The carrying amounts reported in the consolidated balance sheets
approximate fair value for the following financial instruments: cash and due
from banks, federal funds sold, and demand and savings deposits. See Note 3 for
a summary of the estimated fair value of securities.

<TABLE>
<CAPTION>
                                                                         1997                        1996
                                                              --------------------------  --------------------------
                                                                CARRYING     ESTIMATED      CARRYING     ESTIMATED
                                                                 AMOUNT      FAIR VALUE      AMOUNT      FAIR VALUE
                                                              ------------  ------------  ------------  ------------
<S>                                                           <C>           <C>           <C>           <C>
Loans, net..................................................  $140,469,000  $140,038,000  $118,821,000  $118,323,000
Time deposits...............................................  $ 34,320,000  $ 34,319,000  $ 27,167,000  $ 27,172,000
Other borrowings............................................  $ 30,070,000  $ 30,070,000  $ 24,608,000  $ 24,608,000
</TABLE>

    The following methods and assumptions were used by the Company in computing
the estimated fair values in the above table:

                                       44
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

14. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    LOANS, NET--The fair value of variable rate loans is the carrying value as
these loans are regularly adjusted to market rates. The fair value of fixed rate
loans is estimated by discounting the future cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings for
the same remaining maturities. The fair value calculations are adjusted by the
allowance for loan losses.

    TIME DEPOSITS--The fair value of fixed rate time deposits was estimated by
discounting the cash flows using rates currently offered for deposits of similar
remaining maturities.

    OTHER BORROWINGS--The fair value of fixed rate other borrowings was
estimated by discounting the cash flows using rates currently offered for these
types of borrowings of similar remaining maturities.

    UNUSED COMMITMENTS TO EXTEND CREDIT--The fair value of letters of credit and
standby letters of credit is not significant.

15. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

    As described in Note 1 to the consolidated financial statements, the merger
of Coast Commercial Bank with the Company became effective July 25, 1995. The
condensed financial statements of Coast Bancorp (parent company only) follow:

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                     ----------------------------
                                                                                         1997           1996
                                                                                     -------------  -------------
<S>                                                                                  <C>            <C>
CONDENSED BALANCE SHEET
Cash...............................................................................  $   2,643,000  $   2,830,000
Investment in Coast Commercial Bank................................................     25,103,000     20,380,000
Other assets.......................................................................         42,000         28,000
                                                                                     -------------  -------------
    Total..........................................................................  $  27,788,000  $  23,238,000
                                                                                     -------------  -------------
                                                                                     -------------  -------------

Liabilities........................................................................  $      24,000  $      45,000
Stockholders' equity...............................................................     27,764,000     23,193,000
                                                                                     -------------  -------------
    Total..........................................................................  $  27,788,000  $  23,238,000
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>

                                       45
<PAGE>
                                 COAST BANCORP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

15. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                       -------------------------------------------
                                                                           1997           1996           1995
                                                                       -------------  -------------  -------------
<S>                                                                    <C>            <C>            <C>
CONDENSED INCOME STATEMENT
Interest income......................................................  $      85,000  $      88,000  $      39,000
General and administrative expenses..................................       (154,000)      (150,000)       (53,000)
                                                                       -------------  -------------  -------------
Loss before equity in net income of Coast Commercial Bank............        (69,000)       (62,000)       (14,000)
Equity in net income of Coast Commercial Bank:
  Dividends received.................................................      1,048,000      1,116,000      4,000,000
  Equity in net income greater (less) than dividends received........      4,155,000      3,058,000       (842,000)
Income tax benefit...................................................         21,000         16,000          5,000
                                                                       -------------  -------------  -------------
Net income...........................................................  $   5,155,000  $   4,128,000  $   3,149,000
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------

STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Net income...........................................................  $   5,155,000  $   4,128,000  $   3,149,000
Reconciliation of net income to net cash provided by operations:
  Equity in net income greater (less) than dividends received........     (4,155,000)    (3,058,000)       842,000
  Other assets and liabilities.......................................        (40,000)        30,000        (12,000)
                                                                       -------------  -------------  -------------
Net cash provided by operating activities............................        960,000      1,100,000      3,979,000
Cash flows from financing activities:................................
Cash dividends paid..................................................     (1,017,000)      (887,000)      (410,000)
Repurchase of common stock...........................................       (130,000)      (690,000)      (262,000)
                                                                       -------------  -------------  -------------
Net cash used in financing activities................................     (1,147,000)    (1,577,000)      (672,000)
                                                                       -------------  -------------  -------------
Net increase (decrease) in cash......................................       (187,000)      (477,000)     3,307,000
Cash, beginning of period............................................      2,830,000      3,307,000       --
                                                                       -------------  -------------  -------------
Cash, end of period..................................................  $   2,643,000  $   2,830,000  $   3,307,000
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------
</TABLE>

    A principal source of cash for the Company is dividends from its subsidiary
Bank. Banking regulations limit the amount of dividends that may be paid without
prior approval of the Company's regulatory agencies to the lesser of retained
earnings or the net income of the Company for its last three fiscal years, less
any distributions during such period, subject to capital adequacy requirements.
At December 31, 1997, the Company has approximately $6,197,000 available for
payment of dividends which would not require the prior approval of the banking
regulators under this limitation.

                                       46
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Coast Bancorp:

    We have audited the accompanying consolidated balance sheets of Coast
Bancorp and its subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Coast Bancorp and its
subsidiary at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in confomity with generally accepted accounting principles.

                                          Deloitte & Touche LLP

San Jose, California
January 21, 1998

                                       47
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    For information concerning directors and executive officers of the Company,
see "Election of Directors" and "Compliance with Section 16(a) of the Exchange
Act" in the definitive proxy statement for the Company's 1997 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A (Proxy Statement), which is
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

    For information concerning executive compensation, see "Executive
Compensation" in the Proxy Statement, which is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    For information concerning security ownership of certain beneficial owners
and management, see "Security Ownership of Certain Beneficial Owners" and
"Election of Directors" in the Proxy Statement, which is incorporated herein by
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    For information concerning certain relationships and related transactions
see "Indebtedness of Management and Other Transactions" in the Proxy Statement,
which is incorporated herein by reference.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a) 1. and 2.

    The financial statements and supplementary data contained in Item 8 of this
report are filed as part of this report.

    All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in the
financial statements or related notes.

    (a) 3.

    Exhibits are listed in the Index to Exhibits beginning on page 49 of this
report.

    (b) Reports on Form 8-K.

    No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.

                                       48
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                                                 DESCRIPTION
-----------  ---------------------------------------------------------------------------------------------------------
<C>          <S>
       *     Plan of Reorganization and Merger Agreement dated March 7, 1995 by and between Coast Commercial, Coast
               Merger Corporation and Coast Bancorp.

       *     Articles of Incorporation of Coast Bancorp.

       *     Bylaws of Coast Bancorp.

       *     Salary Continuation Agreement dated September 19, 1992 by and between Coast Commercial Bank and Harvey J.
               Nickelson.

       *     Salary Continuation Agreement dated September 19, 1992 by and between Coast Commercial Bank and David V.
               Heald.

       *     Lease by and between Friend, Friend and Friend and Coast Commercial Bank dated November, 1986, for 720
               Front Street, Santa Cruz, California.

       *     Lease by and between Green Valley Corporation and Coast Commercial Bank dated July 12, 1988, for 740
               Front Street, Santa Cruz, California.

       *     Lease by and between Heffernan Family Trust and Coast Commercial Bank dated June 21, 1989, for 1975
               Soquel Drive, Santa Cruz, California.

       *     Lease by and between Martin N. Boone and Robin Sherman and Coast Commercial Bank dated July 16, 1986, for
               7775 Soquel Drive, Aptos, California.

       *     Lease by and between Scott Valley Partners and Coast Commercial Bank dated November 6, 1991, for 203A Mt.
               Hermon Road, Scotts Valley.

       *     Lease by and between Jay Paul and Coast Commercial Bank dated December 1, 1989, for 1055 S. Green Valley
               Road, Watsonville.

       *     Lease by and between Dubois Office Plaza and Coast Commercial Bank dated January 23, 1993, for 140 Dubois
               Street, Santa Cruz.

       *     Coast Commercial Bank Employee Stock Ownership Plan.

       *     Coast Bancorp 1995 Amended and Restated Stock Option Plan.

       *     Deferred Compensation Agreement with Richard E. Alderson dated November 2, 1992.

       *     Deferred Compensation Agreement with Douglas D. Austin Dated November 2, 1992.

       *     Deferred Compensation Agreement with Bud W. Cummings Dated November 2, 1992.

       *     Deferred Compensation Agreement with Ronald M. Israel Dated November 2, 1992.

       *     Deferred Compensation Agreement with Malcolm D. Moore Dated November 2, 1992.

       *     Deferred Compensation Agreement with Gus J.F. Norton Dated November 2, 1992.

       *     Deferred Compensation Agreement with James C. Thompson Dated November 2, 1992.

      23.2   Consent of Deloitte & Touche LLP

      27     Financial Data Schedule
</TABLE>

------------------------

*   Previously filed.

                                       49
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly issued this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                COAST BANCORP
                                DATE: MARCH 25, 1998

                                By:           /s/ HARVEY J. NICKELSON
                                     -----------------------------------------
                                                Harvey J. Nickelson,
                                       PRESIDENT AND CHIEF EXECUTIVE OFFICER

    Pursuant to the requirements of the Securities Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

          SIGNATURE                       TITLE                    DATE
------------------------------  --------------------------  -------------------

    /s/ DOUGLAS D. AUSTIN
------------------------------  Director                      March 25, 1998
      Douglas D. Austin

    /s/ JOHN C. BURROUGHS
------------------------------  Director                      March 25, 1998
      John C. Burroughs

                                Senior Vice President and
     /s/ BRUCE H. KENDALL         Chief Financial Officer
------------------------------    (Principal Financial and    March 25, 1998
       Bruce H. Kendall           Accounting Officer)

     /s/ MALCOLM D. MOORE
------------------------------  Director                      March 25, 1998
       Malcolm D. Moore

   /s/ HARVEY J. NICKLESON
------------------------------  President, Chief Executive    March 25, 1998
     Harvey J. Nickleson          Officer and Director

     /s/ GUS J.F. NORTON
------------------------------  Director                      March 25, 1998
       Gus J.F. Norton

    /s/ JAMES C. THOMPSON
------------------------------  Chairman of the Board of      March 25, 1998
      James C. Thompson           Directors

                                       50