As Filed with the Securities and Exchange Commission on May 29, 2002
File No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under
the Securities Act of 1933
COAST BANCORP
(Name of small business issuer in its charter)
| California | 6021 | 77-0567091 |
| (State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
553 B HIGUERA STREET, SAN LUIS OBISPO, CALIFORNIA 93401
(805) 541-0400
(Address and telephone number of principal executive offices)
553 B HIGUERA STREET, SAN LUIS OBISPO, CALIFORNIA 93401
(Address of principal place of business)
JACK C. WAUCHOPE, PRESIDENT & CHIEF EXECUTIVE OFFICER
553 B HIGUERA STREET, SAN LUIS OBISPO, CALIFORNIA 93401 (805) 541-0400
(Name, address and telephone of agent for service)
Copy to:
R. Brent Faye, Esq.
Nixon Peabody LLP
2 Embarcadero Center, 27th Floor, San Francisco, California 94111 (415) 984-8365
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o
CALCULATION OF REGISTRATION FEE
| Title of each class of securities to be registered | Amount to be registered | Proposed maximum offering price per unit | Proposed maximum aggregate offering price | Amount of registration fee | ||||
| Common Stock, No Par Value(1) | (2) | $(2) | $3,000,000.00 | $276.00(3) | ||||
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
PRELIMINARY PROSPECTUS DATED MAY 29, 2002—SUBJECT TO COMPLETION
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
COAST BANCORP
553 B HIGUERA STREET
SAN LUIS OBISPO, CALIFORNIA 93401
(805) 541-0400
COMMON STOCK, NO PAR VALUE
$ PER SHARE
Shares ($3,000,000)
100 Share Minimum Purchase ($ )
Coast Bancorp is offering up to shares of its common stock for sale at a price of $ per share. See "THE OFFERING." The purpose of the offering is to raise funds as additional regulatory and working capital for Bancorp. The Offering will terminate on July 31, 2002, unless extended at the sole discretion of the Board of Directors of Bancorp.
Prior to this offering, there has been only limited trading market for Bancorp's common stock and it is not expected that an active market will exist as a result of this offering. Bancorp's Common Stock is not listed on Nasdaq or any exchange. However, it is listed on the Over-the-Counter Bulletin Board under the symbol "CTBP.OB". The last sales price of Bancorp common stock on or before , 2002, the last practicable date before printing of this prospectus, was $ , which reflects a sale that occurred on , 2002.
Directors and officers of Bancorp and Coast National Bank have indicated an intention to subscribe for between 38,000–40,000 shares of Bancorp common stock in the offering.
NEITHER THE SECURITIES EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION OR ANY FEDERAL OR STATE BANK REGULATORY AGENCY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES ARE ALSO SUBJECT TO INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL.
FOR A DISCUSSION OF CERTAIN FACTORS IMPORTANT TO YOUR INVESTMENT DECISION, SEE "INVESTMENT RISK FACTORS" COMMENCING ON PAGE OF THIS PROSPECTUS
| | Subscription Price(1) | Underwriting discounts and commissions(2) | Proceeds to Bancorp(3) | |||||
|---|---|---|---|---|---|---|---|---|
| Per Share of Common Stock | $ | N/A | $ | |||||
| Total Maximum | $ | 3,000,000 | N/A | $ | 3,000,000 | |||
The date of this Prospectus is , 2002
| AVAILABLE INFORMATION | 2 | ||
PROSPECTUS SUMMARY | 3 | ||
WHO CAN HELP ANSWER YOUR QUESTIONS? | 5 | ||
INVESTMENT RISK FACTORS | 6 | ||
FORWARD-LOOKING STATEMENTS | 9 | ||
MARKET FOR BANCORP'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS | 10 | ||
THE OFFERING | 11 | ||
General | 11 | ||
Method of Subscription | 11 | ||
DETERMINATION OF OFFERING PRICE | 12 | ||
HANDLING OF STOCK SUBSCRIPTION FUNDS | 13 | ||
REGULATORY LIMITATION | 13 | ||
FEDERAL INCOME TAX CONSEQUENCES | 14 | ||
USE OF PROCEEDS | 17 | ||
PRO FORMA CAPITALIZATION | 17 | ||
BUSINESS | 18 | ||
SUPERVISION AND REGULATION | 21 | ||
PROPERTIES | 27 | ||
LEGAL PROCEEDINGS | 27 | ||
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 28 | ||
MANAGEMENT | 41 | ||
EXECUTIVE COMPENSATION | 44 | ||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 47 | ||
DESCRIPTION OF SECURITIES | 48 | ||
MARKETABILITY OF SECURITIES | 50 | ||
LEGAL MATTERS | 50 | ||
EXPERTS | 50 | ||
FINANCIAL STATEMENTS | 50 | ||
INDEX TO FINANCIAL STATEMENTS | F-1 | ||
This prospectus is a part of a Registration Statement on Form SB-2 filed by Bancorp with the Securities and Exchange Commission under the Securities Act of 1933, as amended. The registration statement registers the shares being offered for sale in the offering. For information in addition to that contained in this prospectus, reference is made to the registration statement, including the exhibits contained in the registration statement.
Bancorp is subject to the informational requirements of the Securities Exchange Act of 1934, as amended and in accordance with the 1934 Act files reports and other information with the Securities and Exchange Commission. These reports, Bancorp's registration statement, can be inspected and copied at the Public Reference Room of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices, including the Northeast Regional Office, The Woolworth Building, 233 Broadway, New York, N.Y. 10279, and the Midwest Regional Office, 175 W. Jackson Boulevard, Suite 900, Chicago, IL 60664. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, Washington, D.C. 20549.
Before becoming the wholly-owned subsidiary of Bancorp, Coast National Bank filed similar reports with the Office of the Comptroller of the Currency. The reports can be obtained at prescribed rates from the Communications Division, Office of the Comptroller of the Currency, 250 E. Street, S.W., Washington, D.C. 20219
NO DEALER, SALESPERSON, AGENT OR OFFICER OF BANCORP OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY BANCORP.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR AN OFFER OF SUCH SECURITIES TO A PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE OF THE SECURITIES COVERED BY THIS PROSPECTUS SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
THE SECURITIES BEING OFFERED MAY NOT BE USED AS COLLATERAL TO SECURE A LOAN FROM COAST NATIONAL BANK.
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The following provides a selective summary of the information contained in this prospectus and is qualified in its entirety by the information and financial statements contained in the prospectus. Potential purchasers are urged to read the entire prospectus carefully, and to give particular attention to the section entitled "INVESTMENT RISK FACTORS" starting on page before making any decision to purchase some of the shares being offered for sale.
COAST BANCORP AND COAST NATIONAL BANK
Coast Bancorp
Coast Bancorp, headquartered in San Luis Obispo, California, is a California corporation incorporated in 2001. Bancorp became the bank holding company of Coast National Bank on May 31, 2001 through a corporate reorganization. In the reorganization, Coast National Bank became the wholly-owned subsidiary of Bancorp and the shareholders of the Bank became shareholders of Bancorp. Coast Bancorp is subject to the regulations of, and examination by, the Board of Governors of the Federal Reserve System. At present, Bancorp does not engage in material business activities other than the ownership of the Bank.
Coast National Bank
Coast National Bank commenced operations on June 16, 1997 with two offices and 16 employees. The original branch offices are located at 486 Marsh Street, San Luis Obispo, and 1199 Grand Avenue, Arroyo Grande, California. Since that time the Bank has moved its administrative function to a leased office near the main branch in San Luis Obispo at 553 B Higuera Street and added branch offices at 948 Morro Bay Boulevard in Morro Bay, California and 1193 Los Osos Valley Road, Los Osos, California. There has not been any material reclassification, merger or consolidation. The Bank purchased a lot adjacent to the main branch in 1999 and subsequently entered into an agreement to purchase the property and building that houses the main branch office. The latter transaction closed on February 1, 2000. The Bank is in the process of constructing what will be the main office on the vacant lot. In March 2002, the Bank purchased a vacant lot at 898 Morro Bay Blvd., Morro Bay, California. It is the intention of the Bank to build on and relocate the Morro Bay Branch to this site. There were no other significant purchases or sale of assets outside the ordinary course of business. There are no proceedings regarding bankruptcy or receivership. The Bank continues to enjoy steady growth in both deposits and loans.
As of December 31, 2001, the Bank had 43 full time equivalent employees engaged to provide banking services to the local community. These services include deposit and savings products, loans for consumers and homeowners as well as local businesses. The Bank faces competition in the market area for all of its banking products from branches of most of the major California money banks, other community banks, savings & loans and credit unions. The Bank also faces competition for some of our deposit products from large securities firms. The Bank appeals to a diverse group of people as business customers as well as individual consumers of services.
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| Class of securities | common stock, no par value | |
Common stock outstanding prior to this offering | 632,400 | |
Number of shares available in this offering | up to shares | |
Offering price per share | $ | |
Minimum purchase | 100 shares ($ ) | |
Maximum purchase | 10,000 shares ($ ) | |
Anticipated use of proceeds | The proceeds from the sale of this offering will be utilized by Bancorp for regulatory and working capital for Bancorp and the Bank. See "USE OF PROCEEDS." | |
Subscription procedures | Delivery of an executed subscription application, IRS Form W-9 and the full subscription price to Coast Bancorp c/o Coast National Bank, 553 B Higuera Street, San Luis Obispo, California 93401 prior to July 31, 2002, or such later date as the Board of Directors may designate. See "Subscription Procedures." | |
Plan of distribution | The offering will be conducted on a best efforts basis by the officers and directors of Bancorp. During the first 14 days of the offering, shares will only be offered to existing shareholders of Bancorp. Preference will be given to subscribers who have the potential to do business with, or to direct customers to, Bancorp and the Bank. See "THE OFFERING—Plan of Distribution." | |
Investment risk factors | Prospective investors should consider the material investment considerations affecting this offering. See "INVESTMENT RISK FACTORS." |
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WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have questions about the offering, you should contact:
Coast Bancorp
553 B Higuera Street
San Luis Obispo, California 93401
Attention: Jack C. Wauchope, President and Chief Executive Officer
or
Thomas J. Sherman, Executive Vice President and Chief Financial Officer
(805) 541-0400
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Management and the Board of Directors of Bancorp recommend that you review this entire prospectus in detail, and in your review, carefully consider the following:
Risks Related to the Offering
There is a limited public market for Bancorp's common stock and no active trading market is anticipated.
Bancorp's common stock is not presently eligible for listing on any exchange or on Nasdaq, and Bancorp does not intend to seek any such listing. However, it is listed on the Over-the-Counter Bulletin Board under the symbol "CTBP.OB." There is limited trading in and no established public trading market for Bancorp's Common Stock. While Bancorp's common stock is not subject to specific restrictions on transfer, Bancorp does not anticipate that an active trading market in its common stock will develop as a result of this offering, and no assurance can be given that an active trading market will develop in the future.
Dividends.
At the present time, the ability of Bancorp to pay dividends is solely reliant on the receipt of dividends and fees from Coast National Bank. The Board of Directors of Bancorp adopted a policy of paying cash and stock dividends subject to the regulatory restrictions on payment of cash dividends, the earnings of Bancorp, management's assessment of future capital needs, and other factors. No assurance can be given that Bancorp will be able to pay cash dividends. See "DESCRIPTION OF SECURITIES—Dividend Rights."
Anti-Takeover Provisions.
For a description of anti-takeover provisions in Bancorp's articles of incorporation, see "DESCRIPTION OF SECURITIES—Provisions of Articles of Incorporation." These anti-takeover provisions may make Bancorp a less attractive target for a takeover bid or merger, potentially depriving shareholders of an opportunity to sell their shares of common stock at a premium over prevailing market prices as a result of a takeover bid or merger.
Risks related to Bancorp's Business and Operations
Bancorp is subject to extensive government regulation.
Bank holding companies and banks are subject to extensive governmental supervision, regulation and control, which have, in the past, materially affected the business of financial institutions. In recent years, the regulations applicable to bank holding companies and banks have changed dramatically. Future legislation and government policy could adversely affect the banking industry, including Bancorp and the Bank. For a description of certain potentially significant changes, see "SUPERVISION AND REGULATION."
There is strong competition in Bancorp's market area.
Bancorp faces substantial competition for deposits and loans throughout its market area, and expects to face substantial competition for its other contemplated products and services. Competition for deposits comes primarily from other commercial banks, savings institutions, credit unions, thrift and loans, money market and mutual funds and other investment alternatives. Competition for loans comes from other commercial banks, savings institutions, mortgage banking firms, credit unions, thrift and loans and other financial intermediaries. Bancorp faces competition for deposits and loans not only from local institutions but also from out-of-state financial intermediaries which have opened low-end
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production offices or which solicit deposits in its market area. Many of the financial intermediaries operating in Bancorp's market area offer certain services, such as trust, investment and international banking services, which Bancorp does not offer directly. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to Bancorp regulatory restrictions have larger lending limits and are thereby able to serve the credit and investment needs of larger customers.
Deterioration of local economic conditions could hurt profitability of Bancorp.
The operations of Bancorp are primarily located in San Luis Obispo County, and surrounding areas. As a result of this geographic concentration, Bancorp's results depend largely upon economic conditions in these areas. Adverse local economic conditions in San Luis Obispo County generally, may have a material adverse effect on the financial condition and results of operations of Bancorp.
Deterioration of real estate markets could hurt Bancorp's performance.
At December 31, 2001 approximately 48% of Bancorp's loans were secured by real estate. The ability of Bancorp to continue to originate real estate secured loans may be impaired by adverse changes in local and regional economic conditions in the real estate market, increasing interest rates, or by acts of nature, including earthquakes and flooding. Due to the concentration of real estate collateral, these events could have a material adverse impact on the value of the collateral resulting in losses to Bancorp. For information about Bancorp's real estate loans, see "Business of the Bank—Lending Activities" and "Bancorp's Management's Discussion And Analysis Of Financial Condition And Results Of Operations—Provision and Allowance for Loan Losses."
Interest rates and general economic conditions may hurt Bancorp's results of operations.
The operating income and net income of Bancorp depend to a great extent on "rate differentials," i.e., the difference between the income it receives from its loans, securities and other earning assets, and the interest expense it pays on its deposits and other liabilities. These rates are highly sensitive to many factors beyond Bancorp's control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities, and in particular, the Board of Governors of the Federal Reserve System. See "SUPERVISION AND REGULATION—Impact of Government Monetary Policy."
Environmental liability associated with commercial lending could result in losses.
In the course of business, Bancorp and Coast National Bank may in the future acquire, through foreclosure, properties securing loans they have originated or purchased which are in default. In commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, Bancorp or the Bank might be required to remove these substances from the affected properties at its sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. Bancorp may not have adequate remedies against the prior owner or other responsible parties or could find it difficult or impossible to sell the affected properties. This could have a material adverse effect on Bancorp's business, financial condition and operating results.
Banks rely heavily on technology and computer systems and computer failure could result in loss of business and adversely affect the stock price of Bancorp.
Advances and changes in technology can significantly impact the business and operations of Bancorp. It may face many challenges including the increased demand for providing computer access to Bancorp accounts and the systems to perform banking transactions electronically. Bancorp's ability to compete depends on its ability to continue to adapt technology on a timely and cost-effective basis to
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meet these demands. In addition, the business and operations of Bancorp are susceptible to negative impacts from computer system failures, communication and energy disruption, and unethical individuals with the technological ability to cause disruptions or failures of its data processing systems.
Bancorp is dependent on its management and management may under certain circumstances have control over Bancorp's common stock.
Bancorp is, and for the foreseeable future will be, dependent upon the services of Jack C. Wauchope, who serves as Chief Executive Officer and President of Bancorp and Chief Executive Officer of the Bank and Thomas J. Sherman, Executive Vice President and Chief Financial Officer of Bancorp and President and Chief Operating Officer of the Bank and upon the services of other senior officers retained by Bancorp. The loss of the services of Mr. Wauchope, Mr. Sherman or other key employees could have a material adverse effect on the operations of Bancorp. See "MANAGEMENT."
The directors and officers of Bancorp have indicated an intention to subscribe for approximately 38,000 or 19% of the shares of Bancorp's common stock in the offering assuming all shares are sold. Assuming all exercisable stock options are exercised, directors and officers of Bancorp would own 21.1% of Bancorp's outstanding shares if all shares are sold in the Offering. This may make it more difficult for shareholders to affect a change in Bancorp's corporate governance without the support of the organizing directors and management. See "MANAGEMENT—Stock Ownership" and "EXECUTIVE COMPENSATION—Stock Options."
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Some matters discussed in this prospectus including, but not limited to, matters described in "Managements Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and which are subject to the "safe harbor" created by those sections. You should understand that all forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Changes to these risks and uncertainties, which could impact future financial performance, include, among others, (1) competitive pressures in the banking industry; (2) changes in interest rate environment; (3) general economic conditions, nationally, regionally and in operating market areas; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) the potential economic effect of the September 11, 2001 terrorist attacks on the World Trade Center and the Pentagon. Therefore, the information contained in this prospectus should be carefully considered when evaluating the business prospects of Bancorp.
Forward-looking statements include, but are not limited to statements containing the words "believes," "anticipates," "intends," "expects," "considers" and words of similar import, as well as among others, the factors discussed in the section entitled "Investment Risk Factors" on page of this prospectus.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Potential investors should not rely heavily on the forward-looking statements.
You should rely only on the information in this prospectus or other information referred to in this document. Bancorp has not authorized anyone to provide you with other or different information. This prospectus is dated , 2002. You should not assume that the information contained in this prospectus is accurate as of any date other than that date, and neither the distribution of this prospectus nor the issuance of shares of Bancorp common stock in the offering shall create an implication to the contrary.
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MARKET FOR BANCORP'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
As of December 31, 2001, the common equity of Bancorp consists of 10,000,000 shares of preferred stock authorized, none of which are outstanding, and 10,000,000 shares of no par value common stock, 632,400 shares of which were outstanding. The stock is not listed on any exchange but is traded over the counter under the symbol CTBP.OB. The following high and low bid information was acquired through Sutro & Co. and may not represent actual transactions.(1)
| | High | Low | | High | Low | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter, 2001 | $ | 14.25 | $ | 14.00 | First Quarter, 2000 | $ | 16.00 | $ | 14.00 | |||||
| Second Quarter, 2001 | $ | 15.90 | $ | 14.00 | Second Quarter, 2000 | $ | 15.50 | $ | 13.50 | |||||
| Third Quarter, 2001 | $ | 14.50 | $ | 14.15 | Third Quarter, 2000 | $ | 14.50 | $ | 14.00 | |||||
| Fourth Quarter, 2001 | $ | 17.00 | $ | 16.50 | Fourth Quarter, 2000 | $ | 14.25 | $ | 14.00 | |||||
For the first quarter of 2002, the high and low bids were $16.00 and $14.00, respectively. The last sales price of Bancorp's common stock on or before , 2002, the last practicable date before printing of this prospectus, was $ , which reflects a sale that occurred on 2002.
There may be other transactions of which Bancorp is not aware and accordingly, they are not reflected in the range of actual sales prices stated. Further, quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Additionally, since trading in Bancorp's common stock is limited, the range of prices stated is not necessarily representative of prices which would result from a more active market.
As of December 31, 2001, there were approximately 423 shareholders of record.
Bancorp declared and paid a cash dividend on December 5, 2001, of $.05 per share on its Common Stock.
Dividends
Bancorp is regulated by the Board of Governors of the Federal Reserve System. Federal Reserve Board regulations prohibit cash dividends, except under limited circumstances, if the distribution would result in a withdrawal of capital or exceed Bancorp's net profits then on hand after deducting its losses and bad debts. Furthermore, cash dividends cannot be paid without the prior written approval of the Federal Reserve Board if the total of all dividends declared in one year exceeds the total of net profits for that year, plus the preceding two calendar years, and less any required transfers to surplus under state or federal law.
The shareholders of Coast Bancorp are entitled to receive dividends when and as declared by its Board of Directors out of funds legally available, subject to the restrictions provided by the California General Corporation Law. The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law also provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may still make a distribution to its shareholders if it meets two conditions, which generally stated are as follows:
The primary source of income for Bancorp, on a stand-alone basis, is the receipt of dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations. See "Supervision and Regulation—The Bank—Payment of Dividends."
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General
Bancorp is offering up to shares of its common stock, no par value at a cash purchase price of $ . per share, for an aggregate consideration of $3,000,000.
Subscriptions will be accepted until 5:00 o'clock p.m., Pacific Time, July 31, 2002, unless the expiration date is extended by Bancorp. Bancorp reserves the right to extend the expiration date for periods of up to thirty (30) days each without notice to subscribers.
The minimum number of shares which may be subscribed for by members of the general public is 100, unless the directors, in their sole discretion, determine otherwise. It is not contemplated that any person, other than a director, will be permitted to purchase more than shares, or 5%, of the shares of Bancorp common stock being offered in the offering, assuming all shares are sold. However, depending upon the availability of shares and the relative value of a particular subscriber to Bancorp, as determined by the directors, the maximum may be increased. The officers and directors have indicated their intentions to subscribe for an aggregate total of approximately 38,0000 shares, equal to approximately 19.00% of the offering assuming all shares are sold. See "MANAGEMENT—Directors, Other Senior Officers."
IN DETERMINING WHICH APPLICATIONS TO ACCEPT, IN WHOLE OR IN PART, THE DIRECTORS MAY, IN THEIR SOLE DISCRETION TAKE INTO ACCOUNT A SUBSCRIBER'S POTENTIAL TO DO BUSINESS WITH, OR TO DIRECT CUSTOMERS TO, BANCORP, AS WELL AS THE ORDER IN WHICH APPLICATIONS ARE RECEIVED.
No discounts or commissions will be paid in connection with the sale of the shares. However, Bancorp reserves the right, in its sole discretion, to engage the services of a broker to assist it in selling the Shares on a best efforts basis. The offering will be made by the officers and directors of Bancorp and Coast National Bank who will solicit subscriptions from prospective shareholders. No promotional stock (stock sold at a discount or for services or other non-cash consideration) will be issued to anyone, including officers and directors.
Bancorp is not obligated to obtain or accept subscriptions for the maximum number of shares being offered by this prospectus, and Bancorp may, in its sole discretion, terminate this offering by accepting all or a portion of those subscriptions. See "HANDLING OF SUBSCRIPTION FUNDS."
Method of Subscription
Applications for stock subscriptions can be made by completing and signing the enclosed Subscription Application and mailing both copies of the application, the enclosed IRS Form W-9, and the full subscription price to Coast Bancorp c/o Coast National Bank, 553 B Higuera Street, San Luis Obispo, California 93401. Bancorp reserves the right to reject a particular application in whole or in part. Bancorp will decide which Applications to accept and all appropriate refunds will be mailed by no later than 30 days after the expiration of the Offering or the extension period during which the Application was received by Bancorp, whichever is later. Subscriptions can be accepted as received.
IMPORTANT: THE FULL SUBSCRIPTION PRICE FOR SHARES MUST BE INCLUDED WITH THE APPLICATION. THE PURCHASE PRICE MUST BE PAID IN UNITED STATES CURRENCY BY CHECK, BANK DRAFT OR MONEY ORDER PAYABLE TO "COAST BANCORP—STOCK SUBSCRIPTION ACCOUNT." FAILURE TO INCLUDE THE FULL SUBSCRIPTION PRICE WITH THE APPLICATION WILL GIVE BANCORP THE RIGHT TO DISREGARD THE APPLICATION.
In the event Bancorp rejects all or a portion of a requested subscription, Bancorp will refund to the subscriber all or the appropriate portion of the amount remitted with the Application, without
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crediting or debiting any gain or loss realized from the investment of subscription funds. See "HANDLING OF SUBSCRIPTION FUNDS." Bancorp will decide which Applications to accept and all appropriate refunds will be mailed by no later than 30 days after the expiration of the offering or the extension period during which the application was received by Bancorp, whichever is later. Subscriptions can be accepted as received.
Certificates for shares of stock duly subscribed and paid for in the offering (to the extent that Bancorp has accepted those subscriptions) will be issued as soon as practicable after completion of the offering.
Plan of Distribution
Bancorp is offering its common stock through its and Coast National Bank's officers and directors on a best efforts basis and presently does not intend to seek the assistance of securities dealers in connection with this offering. However, Bancorp reserves the right, in its sole discretion, to engage the services of a broker to assist it in selling the Shares on a best efforts basis. During the first 14 days of the offering, shares will only be offered to existing shareholders of Bancorp.In soliciting subscriptions Bancorp intends to emphasize prospective shareholders who are residents of San Luis Obispo County as well as a subscriber's potential to do business with, or to direct customers to, Coast National Bank. Subject to limitations on the minimum and maximum numbers of shares that may be purchased in the offering and the right of Bancorp to accept or reject subscriptions in its sole and absolute discretion, preference will be given to subscribers who have the potential to do business with, or to direct customers to, Coast National Bank.
DETERMINATION OF OFFERING PRICE
The subscription price for the shares of common stock was determined by management and approved by Bancorp's Board of Directors based upon information which they believed to be relevant, including an opinion from its financial advisors that the $ subscription price is fair to the existing holders of Bancorp. Management and the Board also considered the recent trading history of the common stock, Bancorp's financial condition and earnings as well as the per share book value of the common stock.
The primary objectives in establishing the subscription price were to maximize net proceeds obtainable from the offering and to enhance the success of the offering.
No assurance can be given that the market price of Bancorp's common stock will not decline during the offering to a level below the subscription price or that a shareholder will be able to sell shares purchased in the offering at a price equal to or greater than the subscription price.
Opinion of Financial Advisor
Bancorp's Board of Directors retained Carpenter & Company, Incorporated as its financial advisor to assist it in establishing the subscription price. Carpenter & Company delivered its written opinion dated , 2002 to Bancorp that the subscription price is fair, from a financial point of view, to the shareholders of Bancorp. Bancorp did not impose any limitations on Carpenter & Company in connection with its opinion.
Carpenter & Company is a nationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with merger transactions and other types of acquisitions, negotiated underwritings, private placements and valuations for corporate and other purposes. Bancorp selected Carpenter & Company to render the opinion on the basis of its experience and expertise and its reputation in banking and investment communities.
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In rendering its opinion in connection with the offering, Carpenter & Company relied upon information and materials provided by Bancorp. In addition, Carpenter & Company met with the directors and management of Bancorp and reviewed other data relating to the economics for the relevant area and of the market value of Bancorp common stock. Carpenter & Company also reviewed drafts of this prospectus, compared Bancorp from a financial point of view with other selected companies in the financial services industry, and considered other information that it considered appropriate. Carpenter & Company has not independently verified the information and documents provided by the directors and management of Bancorp.
Carpenter & Company was paid a fee of $15,000. Bancorp will also pay the expenses of Carpenter & Company and has agreed to indemnify Carpenter & Company from certain liabilities which it may incur in connection with the offering.
HANDLING OF STOCK SUBSCRIPTION FUNDS
All stock subscription funds are to be sent by the subscriber to Coast National Bank as subscription agent. Upon receipt of the funds by Bancorp, they will be placed in the subscription account, and the deposited funds may be invested in short-term government obligations, short-term certificates of deposit of Coast National Bank, and in the federal funds market.
All questions concerning the timeliness, validity, form and eligibility of any subscription in the offering will be determined by Bancorp, whose determination will be final and binding. Bancorp, in its sole discretion, may waive any defect or irregularity, or permit a defect or irregularity to be corrected during a period of time as it may determine, or reject any submitted subscription application. Applications will not be considered as received or accepted until all irregularities have been waived or cured within the time that Bancorp determines, in its sole discretion. Bancorp will not be under any duty to give notification of any defect or irregularity in connection with the submission of a subscription or incur liability for failure to give notification of a defect or irregularity. Bancorp reserves the right to reject a subscription if the subscription does not comply with the terms of the offering or is not in proper form or if the acceptance of an offer or the issuance of the common stock to a subscriber could be considered unlawful. See "Regulatory Limitation."
All questions or requests for assistance concerning the method of subscribing for shares and requests for additional copies of this prospectus should be directed to:
Jack C. Wauchope, President and Chief Executive Officer of Bancorp or to Thomas J. Sherman, Executive Vice President and Chief Financial Officer of Bancorp (805) 541-0400.
Bancorp will not be required to issue shares of common stock in the offering to any person who, in Bancorp's sole judgment and discretion, is required to obtain prior clearance, approval or nondisapproval from any state or federal Bancorp regulatory authority to own or control shares of Bancorp common stock unless, prior to the expiration of the offering, evidence of any required clearance, approval or nondisapproval has been provided to Bancorp.
The Federal Change in Bank Control Act of 1978 prohibits a person or group of persons "acting in concert" from acquiring "control" of a bank unless the Comptroller has been given 60 days' prior written notice of the proposed acquisition and within that time period the Comptroller has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. An acquisition may be made prior to the expiration of the disapproval period if the Comptroller issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the Comptroller, the acquisition of more than 10% of a class of voting stock of a bank would constitute the acquisition of control.
In addition, any "company" must obtain the approval of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, before acquiring 25% (5% in the case of a company that is a bank holding company) or more of the outstanding common stock of Bancorp, or before controlling Bancorp in any other manner.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based on the provisions of the Internal Revenue Code of 1986, as amended, the applicable Treasury Regulations adopted and proposed under the Code, judicial authority and current administrative rulings and practice, all of which are subject to change, possibly with retroactive effect. Except as specifically provided, the following discussion is limited to the U.S. federal income tax consequences relevant to a shareholder who or which is a U.S. Holder. (A "Non-U.S. Holder" is a shareholder that is not a U.S. Holder). A U.S. Holder is
This discussion does not purport to deal with all aspects of U.S. federal income taxation that might be relevant to particular holders in light of their personal investment circumstances or status, nor does it discuss the U.S. federal income tax consequences to certain types of holders subject to special treatment under the U.S. federal income tax laws (for example, financial institutions, insurance companies, dealers in securities, tax-exempt organizations, or taxpayers holding the common stock through a partnership or similar pass-thru entity or as part of a "straddle," "hedge" or "conversion transaction"). Moreover, the effect of any applicable state, local or foreign tax laws is not discussed.
Except as otherwise indicated, this discussion assumes that the shares of the common stock are held by the holders as capital assets (as defined in Section 1221 of the Code).
POTENTIAL STOCK HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SHARES OF COMMON STOCK.
Cash Distributions on the Shares
Cash distributions paid on the shares of common stock will be taxable as ordinary dividend income to the extent of the Bank's current or accumulated earnings and profits. To the extent distributions exceed the holder's allocable share of the Bank's current or accumulated earnings and profits, the distribution will be treated as a return of capital, reducing the adjusted basis of the shares of common stock to the holder and increasing the amount of gain (or reducing the amount of loss) which may be realized by the holder upon sale or exchange of the shares. Any distribution which exceeds the sum of the dividend amount and the adjusted basis of the shares to the holder will be treated as capital gain, if the shares are held as a capital asset. See—"Sale of the Share" below. Subject to applicable limitations, dividends paid to holders that are U.S. corporations will qualify for the dividends received deduction so long as there are sufficient earnings and profits.
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Redemption
Generally, a redemption by the Bank of the shares of common stock for cash will be taxable as a dividend to the extent of the Bank's current or accumulated earnings and profits unless the redemption:
If a redemption is treated as a dividend, holders of the shares will recognize ordinary income in the amount of cash or fair market value of property received, and any basis in the shares will be transferred to the holder's remaining holdings in the Bank. If the redemption is not treated as dividend, the holder of the shares will recognize gain or loss based on the difference between the amount realized and the holder's tax basis in the shares redeemed. See, "Sale of the Shares."
Sale of the Shares
In general, a U.S. Holder who is not a dealer in securities must treat any gain or loss realized upon a taxable disposition of the common stock as long-term capital gain or loss if the U.S. Holder has held the common stock for more than one year and otherwise as short-term capital gain or loss.
The tax rate differential between capital gain and ordinary income for non-corporate taxpayers may be significant. A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is 38.6% for the period from January 1, 2002 to December 31, 2003, 37.6% for the period from January 1, 2004 to December 31, 2005, and 35% for the period from January 1, 2006 to December 31, 2010. The maximum tax rate on long-term capital gain applicable to non-corporate taxpayers is 20% for sales and exchanges of capital assets held for more than one year.
A non-corporate taxpayer may deduct capital losses not offset by capital gains against ordinary income only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry forward unused capital losses indefinitely. A corporate taxpayer must pay tax on its net capital gain at ordinary corporate rates. A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years.
Non-U.S. Holders
A Non-U.S. Holder of common stock will not be subject to U.S. federal income tax on gains realized on the sale, exchange or other disposition of such common stock unless:
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property holding corporation within the meaning of Section 897(c)(2) of the Code for U.S. federal income tax purposes. Bancorp does not believe that it is currently a U.S. real property holding corporation or that it will become one in the future.
Distributions on the common stock generally will be subject to U.S. withholding tax at a 30% rate, except where an applicable U.S. income tax treaty provides for the reduction or elimination of such withholding tax.
Backup Withholding and Information Reporting
Backup withholding tax will apply if a non-corporate U.S. Holder:
The backup withholding rate is 30% for amounts paid after December 31, 2001, 29% for amounts paid after December 31, 2003, and 28% for amounts paid after December 31, 2005. However, for amounts paid after December 31, 2010, the backup withholding rate is currently scheduled to return to the 31% rate in effect prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001. Holders should consult their tax advisers regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption if applicable.
Distributions on the common stock paid to Non-U.S. Holders that are subject to U.S. withholding tax, as described above, generally will be exempt from U.S. backup withholding tax but will be subject to certain information reporting requirements.
Under current Treasury regulations, payments on the sale, exchange, or other disposition of the common stock made to or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, if the broker is (i) a United States person; (ii) a controlled foreign corporation for United States federal income tax purposes; (iii) a foreign person 50% or more of whose gross income is effectively connected with a United States trade or business for a specified three-year period; or (iv) a foreign partnership with certain connections to the United States, then information reporting will be required unless the broker has in its records documentary evidence that the beneficial owner is not a United States person and certain other conditions are met or the beneficial owner otherwise establishes an exemption. Backup withholding will apply to any payment that the broker is required to report if the broker has actual knowledge that the payee is a United States person.
Payment to or through the United States office of a broker will be subject to backup withholding and information reporting unless the beneficial owner certifies, under penalties of perjury, that it is not a United States person or otherwise establishes an exemption.
Non-U.S. Holders should consult their tax advisers regarding the application of information reporting and backup withholding in their particular situations, the availability of an exemption therefrom, and the procedure for obtaining an exemption, if available.
Any amounts withheld under the backup withholding rules will be allowed as a credit against the holder's U.S. federal income tax liability and may entitle that holder to a refund, provided that the required information is furnished to the IRS.
THIS DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE SHARES OF COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS.
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Bancorp intends to use the proceeds of this offering for regulatory and operating capital for Bancorp and the Bank.
This table shows the capitalization of Bancorp at March 31, 2002 and the pro forma consolidated capitalization of Bancorp at that date, as adjusted to give effect to the offering, assuming the sale of shares and gross proceeds of $3,000,000.However, no assurances can given that some or all of the shares will be sold. Additionally, there is no established minimum number of shares being offered, and Bancorp may accept some or all amounts received.
| | Pro Forma Capitalization March 31, 2002 (in 000's) | |||||
|---|---|---|---|---|---|---|
| | Actual | As adjusted for this Offering | ||||
| EQUITY CAPITAL | ||||||
Preferred Stock (no par value): 10,000,000 Shares of Preferred Stock authorized, issued and outstanding—None | ||||||
Common Stock (no par value): 10,000,000 Shares of Common Stock authorized, no par value issued and outstanding: 632,400 at March 31, 2002; if maximum number of shares sold in offering | $ | 6,324,000 | $ | 9,324,000 | ||
Retained earnings | 868,000 | 868,000 | ||||
Total Shareholders' Equity | $ | 7,192,000 | $ | 10,192,000 | ||
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Some matters discussed or incorporated by reference in this prospectus are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. The risks and uncertainties include, but are not limited to, those described in "DESCRIPTION OF BUSINESS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". Therefore, the information in this section should be carefully considered when evaluating the business prospects of Bancorp and the Bank.
General
Coast Bancorp
Coast Bancorp, headquartered in San Luis Obispo, California, is a California corporation incorporated in 2001. Bancorp became the bank holding company of Coast National Bank on May 31, 2001 through a corporate reorganization. In the reorganization, Coast National Bank became the wholly-owned subsidiary of Bancorp and the shareholders of the Bank became shareholders of Bancorp. Coast Bancorp is subject to the regulations of, and examination by, the Board of Governors of the Federal Reserve System. At present, Bancorp does not engage in any material business activities other than the ownership of the Bank.
Coast National Bank
Coast National Bank commenced operations on June 16, 1997 with two offices and 16 employees. The original branch offices are located at 486 Marsh Street, San Luis Obispo, and 1199 Grand Avenue, Arroyo Grande, California. Since that time the Bank has moved its administrative function to a leased office near the main branch in San Luis Obispo at 553 B Higuera Street and added branch offices at 948 Morro Bay Boulevard in Morro Bay, California and 1193 Los Osos Valley Road, Los Osos, California. There has not been any material reclassification, merger or consolidation. The Bank purchased a lot adjacent to the main branch in 1999 and subsequently entered into an agreement to purchase the property and building that houses the main branch office. The latter transaction closed on February 1, 2000. The Bank is in the process of constructing what will be the main office on the vacant lot. In March 2002, the Bank purchased a vacant lot at 898 Morro Bay Boulevard, Morro Bay, California. It is the intention of the Bank to build on and relocate the Morro Bay Branch to this site. There were no other significant purchases or sale of assets outside the ordinary course of business. There are no proceedings regarding bankruptcy or receivership. The Bank continues to enjoy steady growth in both deposits and loans.
As of December 31, 2001, the Bank had 43 full time equivalent employees engaged to provide banking services to the local community. These services include deposit and savings products, loans for consumers and homeowners as well as local businesses. The Bank faces competition in the market area for all of its banking products from branches of most of the major California money banks, other community banks, savings & loans and credit unions. The Bank also faces competition for some of our deposit products from large securities firms. The Bank appeals to a diverse group of people as business customers as well as individual consumers of our services.
Deposits
Most of the Bank's deposits are obtained from individuals, professionals and small and medium-sized businesses. As of December 31, 2001, the Bank had a total of 5,709 accounts representing 3,194 non-interest bearing demand, interest-bearing and money market deposit (checking) accounts with an average balance of approximately $14,000 each; 862 savings accounts with an average balance of
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approximately $4,000 each; and 675 other time accounts with an average balance of approximately $20,000 each.
The Bank's deposits are attracted from individual and commercial customers in approximately the same proportion. A material portion of the Bank's deposits has not been obtained from a single person or a few persons, the loss of any one or more of which would have a material adverse effect on the business of the Bank.
In order to attract loan and deposit business from individuals and small businesses, the Bank maintains lobby hours from 9:00 A.M. to 5:00 P.M., Monday through Thursday at the Morro Bay and Los Osos branches, from 9:00 A.M. to 4:00 P.M., Monday through Thursday at its San Luis Obispo and Arroyo Grande branches. The San Luis Obispo branch offers walk-up window service from 8:00 a.m. to 9:00 a.m. Monday through Friday and from 4:00 p.m. to 6:00 p.m. Monday through Thursday. The Arroyo Grande office offers drive-up service from 8:00 a.m. to 6:00 p.m. Monday through Friday. All branch lobbies are open from 9 A.M. to 6 P.M Friday. The Bank also provides 24-hour automated teller service.
Activities
The Bank concentrates its lending activities in the following areas: commercial, consumer and real estate and construction loans. As of December 31, 2001, these four (4) categories accounted for approximately 19.6%, 32.6%, 40.4% and 7.4%, respectively, of the Bank's loan portfolio. Commercial loans consisted chiefly of loans to local businesses for both short-term seasonal needs and long-term financing requirements.
The Bank follows conservative underwriting policies. The maximum loan to value on commercial real estate loans is 75% with a minimum 1.25% debt service coverage ratio. The maximum loan to value ratio on residential real estate is 80%. Commercial business loans are extended to businesses and professionals within the Bank's trade area and who are largely depositors of the Bank. No material portion of the Bank's loans is concentrated within a single industry or group of related industries. However, as of December 31, 2001 and 2000, 47.8% and 47.8%, respectively, of total loans are secured by real estate. The interest rates charged for the various loans made by the Bank vary with the degree of risk and the size and maturity of the loans involved and are generally affected by competition, governmental regulation and current money market rates.
Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made, the credit-worthiness of the borrower and the term of the loan. To reflect the currently perceived risks of loss associated with its loan portfolio, additions are made to the Bank's allowance for loan losses. The Bank's entire allowance is a valuation allowance; that is, it has been created by direct charges against operations through the provision for loan losses.
The provision for loan losses charged against operations is based on the actual net loan loss expensed plus an amount for other factors which, in management's judgment, deserve recognition in estimating possible loan losses, including:
While these factors are essentially judgmental and may not be reduced to a mathematical formula, it is management's view that the $850,000 allowance, or 1.10% of total loans at December 31, 2001, and the $875,000 allowance, or 1.07% of total loans as of March 31, 2002, were adequate. However, there can be no assurance that in any given period the Bank might not sustain charge-offs, which are
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substantial in relation to the size of the allowance. It is the policy of management to make additions to the allowance so that it remains adequate to cover all anticipated loan charge-offs.
The Bank's financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio. The Bank follows the policy of nonaccrual of interest on a loan at the time the loan is past due ninety (90) days or more, as to interest or principal, unless the loan is well secured and in the process of collection. Interest income from nonaccrual loans is not accrued on the books. Payments received while the loan is on nonaccrual are typically applied against principal. When a loan is placed on a nonaccrual basis, any previously accrued but unpaid interest is reversed and charged against current income unless there is adequate collateral to assure recovery of the accrued interest.
Employees
As of December 31, 2001, the Bank employed 43 full-time equivalent employees. Part-time employees are converted to full-time equivalent employees based on the percentage of their weekly hours worked compared to 40 hours. We believe that we enjoy satisfactory relations with our employees.
Competition
The Bank competes for both loans and deposits with other commercial banks, savings and loan associations, credit unions and other entities, both governmental and corporate, which raise operating capital through the issuance of debt securities. With regard to loans, the Bank competes with other commercial banks, savings and loan associations, consumer finance companies, mortgage companies, credit unions and other lending institutions.
The Bank relies substantially on local promotional activity, personal contacts by its officers, directors and employees, referrals by its shareholders, personalized service and its reputation in the community it serves to compete effectively.
As of June 30, 2001 (the most recent date for which such information is available), the Bank's service area contained sixteen (16) commercial banks having seventy-two (72) branch offices. These offices controlled almost $3.1 billion in deposits. There were also eight (8) credit unions in the service area. The Bank's primary service area is oriented towards business and professional people.
The banking business in California generally, and in the Bank's primary service area specifically, is highly competitive for 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 these major banks have over the Bank are their ability to finance wide-ranging advertising campaigns and to allocate their investment assets, including loans, to regions of higher yield and demand. These banks offer certain services such as international banking which are not offered directly by the Bank but which the Bank has offered indirectly through correspondent institutions when its customers sought these services. In addition, by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Bank. (Legal lending limits to an individual customer are limited to a percentage of a bank's total capital accounts plus reserves for loan losses.) As of December 31, 2001, the Bank's loan limits to individual customers were $1,251,153 for unsecured loans and $2,085,255 for unsecured and secured loans combined. For borrowers desiring loans in excess of the Bank's lending limits, the Bank may, in the future, make such loans on a participation basis with its correspondent banks taking the amount of loans in excess of the Bank's lending limits. In other cases, the Bank may refer such borrowers to larger banks or other lending institutions.
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Other Information
Neither Bancorp nor the Bank holds any material patents, trademarks, licenses, franchises or concessions. No expenditures have been made by the Bank, during the last two fiscal years, on material research activities relating to the development of services or the improvement of existing services.
Based upon present business activities, compliance with federal, state and local provisions regulating discharge of materials into the environment will have no material effects upon the capital expenditures, earnings and competitive position of the Bank.
There have been no significant changes in the kinds of services rendered, the principal markets for or the methods of distribution of such services by the Bank during the last four (4) fiscal years. However, the Bank established a Government Guaranteed Small Business Lending division in the summer of 2000.
The Bank's business is not seasonal. The Bank intends to continue with the same basic commercial banking activities that have characterized the Bank's operations since its inception. The Bank anticipates continued profitable growth while maintaining sound credit and management policies.
Bancorp
Coast Bancorp, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended, and is registered with and subject to the supervision of the Board of Governors of the Federal Reserve System. It is the policy of the Federal Reserve that each bank holding company serves as a source of financial and managerial strength to its subsidiary banks. The Federal Reserve has the authority to examine Coast Bancorp.
The Bank Holding Company Act requires Coast Bancorp to obtain the prior approval of the Federal Reserve before acquisition of all or substantially all of the assets of any bank or ownership or control of the voting shares of any bank if, after giving effect to such acquisition, Coast Bancorp would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Recent amendments to the Bank Holding Company Act expand the circumstances under which a bank holding company may acquire control of or all or substantially all of the assets of a bank located outside the State of California.
Coast Bancorp may not engage in any business other than managing or controlling banks or furnishing services to its subsidiaries, with the exception of certain activities which, in the opinion of the Federal Reserve, are so closely related to banking or to managing or controlling banks as to be incidental to banking. The Gramm-Leach-Bliley Act, federal legislation enacted in 2000, offers bank holding companies an opportunity to broaden the scope of activities engaged in by electing to be treated as a financial holding company. A financial holding company enjoys broader powers than a bank holding company, specifically including the ability to own securities and insurance companies in addition to financial institutions. Coast Bancorp has not determined whether or not to become a financial holding company. Coast Bancorp is generally prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company unless that company is engaged in such authorized activities and the Federal Reserve approves the acquisition.
Coast Bancorp and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or provision of services. For example, with certain exceptions the Bank may not condition an extension of credit on a customer obtaining other services provided by it, Coast Bancorp or any other subsidiary, or on a promise by the customer not to obtain other services from a competitor. In addition, federal law imposes certain restrictions on transactions between Coast National Bank and its affiliates. As affiliates, Coast National Bank and
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Coast Bancorp are subject with certain exceptions, to the provisions of federal law imposing limitations on and requiring collateral for extensions of credit by Coast National Bank to any affiliate.
The Bank
The Bank is regulated and supervised by the Comptroller of the Currency and subject to periodic examination by the Comptroller. Deposits of the Bank's customers are insured by the FDIC up to the maximum limit of $100,000, and, as an insured bank, the Bank is subject to certain regulations of the FDIC. As a national bank, the Bank is a member of the Federal Reserve System and is also subject to the regulations of the Federal Reserve Board.
The regulations of those federal bank regulatory agencies govern most aspects of the Bank's business and operations, including but not limited to, requiring the maintenance of non-interest bearing reserves on deposits, limiting the nature and amount of investments and loans which may be made, regulating the issuance of securities, restricting the payment of dividends and regulating bank expansion and bank activities and the maximum rates of interest allowed on certain deposits. The Bank also is subject to the requirements and restrictions of various consumer laws and regulations.
The following description of selected statutory and regulatory provisions and proposals is not intended to be a complete description of these provisions or of the many laws and regulations to which the Bank is subject, and is qualified in its entirety by reference to the particular statutory or regulatory provisions discussed.
A. Effect of State Law
The laws of the State of California also affect the Bank's business and operations. For example, under 12 U.S.C. 36, as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, state laws regarding community reinvestment, consumer protection, fair lending and establishment of intrastate branches may affect the operations of national banks in states other than their home states. On a similar basis, 12 U.S.C. 85 provides that state law, in most circumstances, determines the maximum rate of interest which a national bank may charge on a loan. As California law exempts all state-chartered and national banks from the application of its usury laws, national banks are also provided such an exemption by 12 U.S.C. 85.
B. Change in Bank Control
The Bank Holding Company Act of 1956, as amended and the Change in Bank Control Act of 1978, as amended, together with regulations of the FRB and the Comptroller, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the Comptroller and not disapproved prior to any person or company acquiring "control" of a national bank, such as the Bank, subject to exemptions for some transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the company has registered securities under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or no other person will own a greater percentage of that class of voting securities immediately after the transaction.
C. Payment of Dividends
The ability of the Bank to make dividend payments is subject to statutory and regulatory restrictions. After the first three years of operations, the Board of Directors of a national bank may declare the payment of dividends depending upon the earnings, financial condition and cash needs of the bank and general business conditions. A national bank may not pay dividends from its capital. All dividends must be paid out of net profits then on hand, after deducting losses and bad debts. A
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national bank is further prohibited from declaring a dividend on its shares of common stock until its surplus fund equals the amount of capital stock or until 10% of the bank's net profits of the preceding half year in the case of quarterly or semiannual dividends, or the preceding two consecutive half-year periods in the case of an annual dividend, are transferred to the surplus fund. The approval of the Comptroller is required for the payment of dividends if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits of that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock.
In addition to the above requirements, guidelines adopted by the Comptroller set forth factors which are to be considered by a national bank in determining the payment of dividends. A national bank, in assessing the payment of dividends, is to evaluate the bank's capital position, its maintenance of an adequate allowance for loan and lease losses, and the need to revise or develop a comprehensive capital plan. See "Capital Standards".
The Comptroller also has broad authority to prohibit a national bank from engaging in banking practices which it considers to be unsafe or unsound. It is possible, depending upon the financial condition of the national bank in question and other factors, that the Comptroller may assert that the payment of dividends or other payments by a bank is considered an unsafe or unsound banking practice and therefore, implement corrective action to address such a practice.
Accordingly, the future payment of cash dividends by the Bank will not only depend upon the Bank's earnings during any fiscal period but will also depend upon the assessment of its Board of Directors of capital requirements and other factors, including dividend guidelines and the maintenance of an adequate allowance for loan and lease losses.
D. Capital Standards
The Board of Governors, the Comptroller 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%. At least one-half of the qualifying capital must be in the form of Tier 1 capital.
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,
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however, 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.
In addition to evaluating capital ratios, an overall assessment of capital adequacy must take account of each of these other factors including, in particular, the level and severity of problem and adversely classified assets. For this reason, the final supervisory judgment on a bank's capital adequacy may differ significantly from the conclusions that might be drawn solely from the absolute level of the bank's risk-based capital ratio. The Comptroller has stated that banks generally are expected to operate above the minimum risk-based capital ratio. Banks contemplating significant expansion plans, as well as those institutions with high or inordinate levels of risk, should hold capital consistent with the level and nature of the risks to which they are exposed.
Further, the banking agencies have adopted modifications to the risk-based capital regulations to include standards for interest rate risk exposures. Interest rate risk is the exposure of a bank's current and future earnings and equity capital arising from movements in interest rates. While interest rate risk is inherent in a bank's role as a financial intermediary, it introduces volatility to bank earnings and to the economic value of the bank. The banking agencies have addressed this problem by implementing changes to the capital standards to include a bank's exposure to declines in the economic value of its capital due to changes in interest rates as a factor that the banking agencies consider in evaluating an institution's capital adequacy. Bank examiners consider a bank's historical financial performance and its earnings exposure to interest rate movements as well as qualitative factors such as the adequacy of a bank's internal interest rate risk management.
Finally, institutions with significant trading activities must measure and hold capital for exposure to general market risk arising from fluctuations in interest rates, equity prices, foreign exchange rates and commodity prices and exposure to specific risk associated with debt and equity positions in the trading portfolio. General market risk refers to changes in the market value of on-balance-sheet assets and off-balance-sheet items resulting from broad market movements. Specific market risk refers to changes in the market value of individual positions due to factors other than broad market movements and includes such risks as the credit risk of an instrument's issuer. The additional capital requirements apply effective January 1, 1998 to institutions with trading assets and liabilities equal to 10% or more of total assets or trading activity of $1 billion or more. The federal banking agencies may apply the market risk regulations on a case by case basis to institutions not meeting the eligibility criteria if necessary for safety and soundness reasons.
The federal banking agencies will evaluate an institution in its periodic examination on the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices can affect a financial institution's earnings or capital. In addition, the agencies focus in the examination on an institution's ability to monitor and manage its market risk, and will provide management with a clearer and more focused indication of supervisory concerns in this area.
Under certain circumstances, the Comptroller may determine that the capital ratios for a national bank shall be maintained at levels which are higher than the minimum levels required by the guidelines. A national bank which does not achieve and maintain adequate capital levels as required may be subject to supervisory action by the Comptroller through the issuance of a capital directive to ensure the maintenance of required capital levels. In addition, the Bank is required to meet certain guidelines of the Comptroller concerning the maintenance of an adequate allowance for loan and lease losses.
24
The regulatory capital guidelines as well as the actual capitalization for the Bank and the Company on a consolidated basis as of March 31, 2002 and December 31, 2001 follow:
Set forth below is the Bank's risk based and leverage capital ratios as of March 31, 2002 and December 31, 2001:
| | Minimum Requirements | Well Capitalized | Three Months Ended March 31, 2002 | December 31, 2001 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Total risk-based capital ratio | 8.00 | % | 10.00 | % | 10.52 | % | 10.48 | % | |
| Tier 1 risk-based capital ratio | 4.00 | % | 6.00 | % | 9.44 | % | 9.41 | % | |
| Tier 1 leverage capital ratio | 4.00 | % | 5.00 | % | 7.37 | % | 7.15 | % |
Recent and Proposed Legislation
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, is the result of a decade of debate in the Congress regarding a fundamental reformation of the nation's financial system. The law is subdivided into seven titles, by functional area. Title I acts to facilitate affiliations among banks, insurance companies and securities firms. The law authorizes national banks to form financial subsidiaries, a new type of subsidiary entity, which are authorized to participate in a wide range of financial activities. Title II narrows the exemptions from the securities laws previously enjoyed by banks, requires the Federal Reserve and the SEC to work together to draft rules governing certain securities activities of banks and creates a new, voluntary investment bank holding company. Title III restates the proposition that the states are the functional regulators for all insurance activities, including the insurance activities of federally-chartered banks. The law bars the states from prohibiting insurance activities by depository institutions. The law encourages the states to develop uniform or reciprocal rules for the licensing of insurance agents. Title IV prohibits the creation of additional unitary thrift holding companies. Title V imposes significant requirements on financial institutions related to the transfer of nonpublic personal information. These provisions require each institution to develop and distribute to accountholders an information disclosure policy, and requires that the policy allow customers to, and for the institution to, honor a customer's request to "opt-out" of the proposed transfer of specified nonpublic information to third parties. Title VI reforms the Federal Home Loan Bank system to allow broader access among depository institutions to the systems advance programs, and to improve the corporate governance and capital maintenance requirements for the system. Title VII addresses a multitude of issues including disclosure of ATM surcharging practices, disclosure of agreements among non-governmental entities and insured depository institutions which donate to non-governmental entities regarding donations made in connection with the Community Reinvestment Act (the "CRA"), and disclosure by the recipient non-governmental entities of how such funds are used. Additionally, the law extends the period of time between CRA examinations of community banks.
The Bank will evaluate the strategic opportunities presented by the broad powers granted to banks that choose to form a financial subsidiary. In the event that the Bank determines that access to the powers of a financial subsidiary is in the best interests of the Bank and its shareholders, the Bank will file the appropriate election with the Comptroller.
The Bank intends to comply with all provisions of the Gramm-Leach-Bliley Act and all implementing regulations as they become effective, and to develop appropriate policies and procedures to meet its responsibilities in connection with the privacy provisions of Title V of that Act.
USA Patriot Act
As part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act"), signed into law on October 26,
25
2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLAFATA"). IMLAFATA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, or other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions. Covered financial institutions also are barred from dealing with foreign "shell" banks. In addition, IMLAFATA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.
Treasury regulations implementing the due diligence requirements must be issued no later than April 24, 2002. Whether or not regulations are adopted, the law becomes effective July 23, 2002. Additional regulations are to be adopted during 2002 to implement minimum standards to verify customer identity, to encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, to prohibit the anonymous use of "concentration accounts," and to require all covered financial institutions to have in place a Bank Secrecy Act compliance program. IMLAFATA also amends the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing an application under these acts.
The Bank has in place a bank secrecy act compliance program, and it engages in very few transactions of any kind with foreign financial institutions or foreign persons.
Impact of Government Monetary Policy
The earnings of the Bank are and will be affected by the policies of regulatory authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments used to implement these objectives are open market operations in U.S. Government securities, changes in reserve requirements against bank deposits, and changes in the discount rate which banks pay on advances from the Federal Reserve System. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates on loans or interest rates paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effect, if any, of such policies upon the future business earnings of the Bank cannot be predicted.
Extensions of Credit to Insiders and Transactions with Affiliates
The Federal Reserve Act and FRB Regulation O, which are applicable to national banks, place limitations and conditions on loans or extensions of credit to: a bank's or bank holding company's executive officers, directors and principal shareholders (i.e., in most cases, those persons who own, control or have power to vote more than 10% of any class of voting securities); any company controlled by any such executive officer, director or shareholder; or any political or campaign committee controlled by such executive officer, director or principal shareholder.
Loans extended to any of the above persons must comply with loan-to-one-borrower limits, require prior full board approval when aggregate extensions of credit to such person exceed specified amounts, must be made on substantially the same terms (including interest rates and collateral) as, and follow credit-underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with non-insiders, and must not involve more than the normal risk of repayment or present other unfavorable features. Regulation O also prohibits a bank from paying an
26
overdraft on an account of an executive officer or director, except pursuant to a written pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or a written pre-authorized transfer of funds from another account of the officer or director at the bank.
The provisions of Regulation O summarized above reflect substantial strengthening as a result of the adoption of FDICIA. FDICIA also resulted in an amendment to Regulation O which provides that the aggregate limit on extensions of credit to all insiders of a bank as a group cannot exceed the bank's unimpaired capital and unimpaired surplus. An exception to this limitation is provided for banks with less than $100,000,000 in deposits. The aggregate limit applicable to such banks is two times the bank's unimpaired capital and unimpaired surplus, provided the bank meets or exceeds all applicable capital requirements.
Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with various consumer protection laws and their implementing regulations. The Bank is subject to many federal consumer protection statutes and regulations, including the Community Reinvestment Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. Penalties under these statutes may include fines, reimbursements and other penalties. Due to heightened regulatory concern related to compliance with these and other statutes generally, the Bank may incur additional compliance costs.
Other
Various other legislation, including proposals to overhaul the bank regulatory system and to limit the investments that a depository institution may make with insured funds, is introduced into Congress or the California Legislature from time to time. Bancorp and the Bank cannot determine the ultimate effect that any potential legislation, if enacted, or regulations promulgated thereunder, would have upon the financial condition or operations of Bancorp or the Bank.
The Bank presently occupies four locations, two of which are owned. The San Luis Obispo branch located at 486 Marsh Street, San Luis Obispo, California is owned. The Arroyo Grande location is also owned by the Bank and is located at 1199 Grand Avenue, Arroyo Grande with the adjoining lot leased for additional parking. This lease expires in March 2003, with five options to extend of five years each. The Morro Bay branch located at 948 Morro Bay Boulevard, Morro Bay is a leased facility which expires March 2004, with two three year options to renew. The Los Osos branch located at 1193 Los Osos Valley Road, Los Osos, is a leased facility which expires July 2002, with three five year options to renew. The Bank plans on renewing this lease. The Bank also occupies offices at 553 B Higuera Street, San Luis Obispo, which functions as the Bank's administrative office. The lease on the administrative building expires in February 2003. The Bank purchased and now occupies offices at 545 Higuera Street. In addition, the Bank has acquired the vacant lot adjacent to the San Luis Obispo branch, and is in the process of constructing what will be the main office. In March 2002, the Bank purchased a vacant lot at 898 Morro Bay Boulevard, Morro Bay, California. It is the intention of the Bank to build on and relocate the Morro Bay Branch to this site.
Bancorp is not a defendant in any material pending legal proceedings and no such proceedings are known to be contemplated. No director, officer, affiliate, more than 5% shareholder of Bancorp or any associate of these persons is a party adverse to Bancorp or has a material interest adverse to Bancorp in any material legal proceeding.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this prospectus are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Changes to such risks and uncertainties, which could impact future financial performance, include, among others, (1) competitive pressures in the banking industry; (2) changes in interest rate environment; (3) general economic conditions, nationally, regionally and in operating market areas; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) the potential economic effect of the September 11, 2001 terrorist attacks on the World Trade Center and the Pentagon. Therefore, the information set forth therein should be carefully considered when evaluating business prospects of Bancorp.
March 31, 2002 v. March 31, 2001
The accompanying unaudited financial information should be read in conjunction with Coast Bancorp's audited financial statements for the years ended December 31, 2001 and 2002, the unaudited interim financial statements for the periods ended March 31,2002 and 2002, and "MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION—December 31, 2001 v. December 31, 2000," contained elsewhere in this prospectus. Results of operation as of March 31, 2002 are not necessarily indicative of an entire years operations.
Overview
For the three months ended March 31, 2002 the Bank reported net income of $136,000 or $0.20 diluted earnings per share compared to net income of $146,000 and $0.23 diluted earnings per share for the same period during 2001.
Net Interest Income
Net interest income is the amount by which the interest and amortization of fees generated from loans and other earning assets exceed the cost of funding those assets, usually deposit account interest expense. Net interest income depends on the difference (the "interest rate spread') between gross interest and fees earned on the loans and investment portfolios and the interest rates paid on deposits and borrowings. Net interest income was $1,140,000 for the quarter ended March 31, 2002, compared to $1,039,000 for the quarter ended March 31, 2001 an increase of 9.72%.
The following table sets forth the components of net interest income, average earning assets and net interest margin: (in thousands):
| | Three Months Ended | | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | March 31, 2002 | March 31, 2001 | Year Ended December 31, 2001 | ||||||||
| Interest Income | $ | 1,544 | $ | 1,856 | $ | 7,084 | |||||
| Interest Expense | 404 | 817 | 2,773 | ||||||||
| Net Interest Income | $ | 1,140 | $ | 1,039 | $ | 4,311 | |||||
| Average Earning Assets | $ | 94,993 | $ | 88,176 | $ | 93,823 | |||||
| Net Interest Margin | 4.80 | % | 4.71 | % | 4.59 | % | |||||
The significant increase in net interest income in 2002 compared to March 31, 2001 was primarily the result of the significant growth in interest-earning assets generated by the Bank's branches. The Company also experienced an increase in the net interest margin due to the decline in the interest rate expense during the first quarter of 2002. Interest expense declined during the first quarter of 2002, as a result of the declining interest rate environment.
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Provision for Loan Losses
The Company made a $20,000 contribution to the allowance for loan losses for the three months ended March 31, 2002 compared to $25,000 for the same period in 2001. Management believes that the allowance, which equals 1.07% of total loans at March 31, 2002, is adequate to cover future losses. The allowance for loan losses at December 31, 2001 was also 1.11% of total loans.
Changes in the allowance for loan losses for the quarter ended March 31, 2002 and 2001 are as follows (dollar amounts in thousands):
| | Three Months Ended | |||||
|---|---|---|---|---|---|---|
| | March 31, 2002 | March 31, 2001 | ||||
| Allowance, Beginning of Period | $ | 850 | $ | 700 | ||
| Provision for Loan Losses | 20 | 25 | ||||
| Loans Charged Off—net of Recoveries | 5 | — | ||||
| Allowance, End of Period | $ | 875 | $ | 725 | ||
Noninterest Income
Noninterest income represents deposit account service charges and other types of non-loan related fee income. Noninterest income for the quarter ended March 31, 2002 totaled $111,000 compared to $75,000 for the same period in 2001 a 48.0% increase. This increase is primarily due to the growth in deposit accounts and realized gains on the sale of investment securities.
Noninterest Expense
Noninterest expense represents salaries, occupancy expenses, professional expenses, outside services and other miscellaneous expenses necessary to conduct business. Noninterest expense for the quarter ended March 31, 2002 totaled $992,000 compared to $839,000 for the same period in 2001 for an increase of 18.2%. This increase is primarily due to the expansion of government guaranteed lending specializing in Small Business Administration lending programs during 2001 and the overall expansion of the customer base.
Income Taxes
The Bank recorded a $103,000 tax provision during the first quarter of 2002 compared to $104,000 during the same period in 2001.
Financial Condition
Total assets as of March 31, 2002 decreased 1.07% to $103.5 million in comparison to total assets of $104.6 million as of December 31, 2001. Compared to total assets of $101.9 million at March 31, 2001 the company has increased assets by $1.6 million or 1.57%. The increase is primarily due to the interest rate environment. The majority of the increase was centered in loans, which increased by $15.5 million from $64.6 million at March 31, 2001 to $80.1 million at March 31, 200. This growth was funded by the reduction of Federal Funds Sold at an average rate of 3.98% and from a $16.6 million, or 21.3%, increase in deposits since March 31, 2000.
Asset Quality
As of March 31, 2002, and March 31, 2001 the Company had no loans on nonaccrual or loans 90 day past due and still accruing. As of December 31, 2001 the company had one loan in the amount of $55,000 on non-accrual, fully secured by an SBA guarantee. As of March 31, the Company has had no OREO during 2002 or 2001.
29
Capital
The objective of the Company's asset/liability strategy is to manage liquidity and interest rate risk and to ensure the safety and soundness of the Bank and it's capital base, while maintaining adequate net interest margins and spreads to provide an appropriate return to the shareholders.
Shareholders equity at March 31, 2002 was $7.225 million, compared to $7.156 million at December 31, 2001. Average shareholder's equity for the three months ended March 31, 2002 was $7.1 million compared to $6.5 million in 2001. Shareholders equity increased primarily from net income of $136 thousand and partially offset by unrealized security losses of $33,000 and realized security gains of $34,000.
The Company is required to meet certain minimum risk-based capital guidelines and leverage ratios set by the bank regulatory authorities. The risk-based capital standards establish capital requirements that are more sensitive to risk differences between various assets, consider off balance sheet activities in assessing capital adequacy, and minimize the disincentives to holding liquid, low risk assets. The leverage ratio consists of tangible Tier I capital divided by average total assets.
For regulatory capital guidelines as well as the actual capitalization for the Bank and the Company on a consolidated basis as of March 31, 2002 and December 31, 2001, see "SUPERVISION AND REGULATION—D. Capital Standards."
Liquidity
Management is not aware of any future capital expenditures or other significant demands on commitments which would severely impair liquidity.
December 31, 2001 v. December 31, 2000
The following sections set forth a discussion of the significant operating changes, business trends, financial condition, earnings, capital position, and liquidity that have occurred in the two-year period ended December 31, 2001, together with an assessment, when considered appropriate, of external factors that may affect us in the future. This discussion should be read in conjunction with our consolidated financial statements and notes included herein.
OVERVIEW
Earnings Summary
Net income in 2001 was $647,588, an increase of $3,754 or .58%, compared to $643,834 in 2000. Diluted earnings per share in 2001 were $.99 compared to $1.00 in 2000. The increase in earnings in 2001 was due primarily to the decrease in interest expense and the gains on sale of securities and guaranteed portions of government loans.
Net income in 2000 was $643,834, an increase of $302,878, compared to $340,955 in 1999. Diluted earnings per share in 2000 were $1.00 compared to $0.53 in 1999. The increase in earnings in 2000 was due primarily to the overall growth of the Bank.
Balance Sheet Summary
Total assets at December 31, 2001 were $104.6 million, a $7.8 million or 8.0% increase from $96.8 million at December 31, 2000. Average assets for 2001 were $102.2 million compared to $86.6 million for 2000. Total deposits increased $6.5 million or 7.31% to $96.5 million at December 31, 2001. Gross loans increased $14.5 million or 23.8%, to $76.9 million at December 31, 2001. Shareholder's equity increased $.7 million or 12.48%, to $7.1 million at December 31, 2001.
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The following table sets forth several key operating ratios for 2001 and 2000:
| | For the Year Ended December 31, | ||||
|---|---|---|---|---|---|
| | 2001 | 2000 | |||
| Return on Average Assets | 0.63 | % | 0.74 | % | |
| Return on Average Equity | 9.33 | % | 10.92 | % | |
| Average Shareholder's Equity to Average Total Assets | 6.79 | % | 6.80 | % | |
Distribution Of Assets, Liabilities, And Shareholders' Equity
The following table presents, for the years indicated, the distribution of average assets, liabilities and shareholders' equity, as well as the total dollar amounts of interest income from average interest-earning assets and the resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual loans are included in the calculation of the average balances of loans, and interest not accrued is excluded (dollar amounts in thousands).
| | For the Year Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | ||||||||||||||||
| | Average Balance | Interest Earned or Paid | Average Yield or Rate Paid | Average Balance | Interest Earned or Paid | Average Yield or Rate Paid | ||||||||||||
| Assets | ||||||||||||||||||
| Interest-Earning Assets: | ||||||||||||||||||
| Investment Securities | $ | 14,782 | $ | 760 | 5.14 | % | $ | 18,719 | $ | 1,070 | 5.72 | % | ||||||
| Federal Funds Sold | 8,399 | 334 | 3.98 | % | 5,275 | 331 | 6.27 | % | ||||||||||
| Other Earning Assets | 245 | 17 | 6.94 | % | 300 | 17 | 5.67 | % | ||||||||||
| Loans | 70,397 | 5,973 | 8.48 | % | 54,094 | 5,327 | 9.85 | % | ||||||||||
| Total Interest-Earning Assets | 93,823 | 7,084 | 7.55 | % | 78,388 | 6,745 | 8.60 | % | ||||||||||
| Cash and Due From Banks | 4,647 | 4,527 | ||||||||||||||||
| Premises and Equipment | 3,656 | 3,489 | ||||||||||||||||
| Other Real Estate Owned | — | — | ||||||||||||||||
| Accrued Interest and Other Assets | 911 | 711 | ||||||||||||||||
| Allowance for Loan Losses | (754 | ) | (549 | ) | ||||||||||||||
| Total Assets | $ | 102,283 | $ | 86,566 | ||||||||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||
| Interest-Bearing Liabilities: | ||||||||||||||||||
| Money Market and NOW | $ | 30,801 | 814 | 2.64 | % | $ | 25,312 | 926 | 3.66 | % | ||||||||
| Savings | 3,973 | 93 | 2.34 | % | 3,320 | 94 | 2.83 | % | ||||||||||
| Time Deposits under $100,000 | 16,014 | 753 | 4.70 | % | 15,293 | 822 | 5.38 | % | ||||||||||
| Time Deposits of $100,000 or More | 21,925 | 1,085 | 4.95 | % | 17,576 | 996 | 5.67 | % | ||||||||||
| Other | 370 | 28 | 7.57 | % | 250 | 20 | 8.00 | % | ||||||||||
| Total Interest-Bearing Liabilities | 73,083 | 2,773 | 3.79 | % | 61,751 | 2,858 | 4.63 | % | ||||||||||
| Noninterest-Bearing Liabilities: | ||||||||||||||||||
| Demand Deposits | 21,945 | 18,711 | ||||||||||||||||
| Other Liabilities | 315 | 209 | ||||||||||||||||
| Shareholders' Equity | 6,940 | 5,895 | ||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 102,283 | $ | 86,566 | ||||||||||||||
| Net Interest Income | $ | 4,311 | $ | 3,887 | ||||||||||||||
| Net Yield on Interest-Earning Assets | 4.59 | % | 4.96 | % | ||||||||||||||
31
EARNINGS ANALYSIS
Net Interest Income
A significant component of our earnings is net interest income. Net interest income is the difference between the interest we earn on our loans and investments and the interest we pay on deposits and other interest-bearing liabilities.
Our net interest income is affected by changes in the amount and mix of our interest-earning assets and interest-bearing liabilities, referred to as a "volume change". It is also affected by changes in the yields we earn on interest-earning assets and rates we pay on interest-bearing deposits and other borrowed funds, referred to as a "rate change".
The following table sets forth changes in interest income and interest expense for each major category of interest-earning asset and interest-bearing liability, and the amount of change attributable to volume and rate changes for the years indicated. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each (dollar amounts in thousands).
| | Year Ended December 31, 2001 versus Year Ended December 31, 2000 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Increase (Decrease) Due To Change in | ||||||||||
| | Volume | Rate | Total | ||||||||
| Interest-Earning Assets: | |||||||||||
| Investment Securities | $ | (209 | ) | $ | (101 | ) | $ | (310 | ) | ||
| Federal Funds Sold | 151 | (148 | ) | 3 | |||||||
| Other Earning Assets | (3 | ) | 3 | — | |||||||
| Loans | 1,453 | (807 | ) | 646 | |||||||
| Total Interest Income | 1,392 | (1,053 | ) | 339 | |||||||
Interest-Bearing Liabilities: | |||||||||||
| Transaction accounts | 176 | (288 | ) | (112 | ) | ||||||
| Savings | 16 | (17 | ) | (1 | ) | ||||||
| Time Deposits | 38 | (107 | ) | (69 | ) | ||||||
| Time Deposits $100,000 or more | 225 | (136 | ) | 89 | |||||||
| Other | 9 | (1 | ) | 8 | |||||||
| Total Interest Expense | 464 | (549 | ) | (85 | ) | ||||||
| Net Interest Income | $ | 928 | $ | (504 | ) | $ | 424 | ||||
2001 Compared To 2000
Net interest income for 2001 was $4.3 million, an increase of 10.9% compared to the $3.9 million reported in 2000. This increase was primarily due to the increase in interest earning assets.
Interest income in 2001 was $7.1 million, a $.3 million or a 5.0% increase over the $6.7 million recorded in 2000. The increase in interest income was the result primarily of an increase in loan totals. This was achieved despite a significant downward trend in interest rates during the year. The Federal Reserve acted to reduce the discount rate, which resulted in a reduction in the prime lending rate, from 9.50% beginning in January 2001 to 4.75% by year end 2001. This resulted in a reduction of the prime lending rate. However, total loans outstanding increased 23.8% to $76.9 million in 2001 compared to $62.1 million in 2000. The yield on all interest-earning assets decreased 105 basis points to 7.55% from 8.60% in 2000.
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Interest expense decreased in 2001 with the declining Federal Reserve discount rate. Interest expense was $2.8 million in 2001, compared to $2.9 million in 2000. Average interest-bearing liabilities increased 18.1% to $72.9 million in 2001 compared to $61.8 million in 2000. Rates on interest bearing deposits decreased 83 basis points to 3.80% from 4.63% in 2000.
Noninterest Income
The Bank receives noninterest income primarily from service charges and fees on accounts and the sale of government guaranteed loans. In 2001, noninterest income was $608,292, an increase of $438,446 or 258.1% compared to the 2000 amount of $169,846. The majority of the increase is attributable to increases in the gain on sale of securities and gain on sale of loans.
Noninterest Expense
Noninterest expense reflects our costs of products and services related to systems, facilities and personnel. The major components of noninterest expense stated as a percentage of average assets are as follows:
| | 2001 | 2000 | |||
|---|---|---|---|---|---|
| Salaries and Employee Benefits | 1.92 | % | 1.79 | % | |
| Occupancy Expenses | .20 | .20 | |||
| Furniture and Equipment | .17 | .19 | |||
| Data Processing | .32 | .27 | |||
| Marketing and Business Promotion | .26 | .31 | |||
| Other Professional Expenses | .12 | .18 | |||
| Office Expenses | .17 | .15 | |||
| Other | .34 | .39 | |||
| 3.50 | % | 3.48 | % | ||
Noninterest expense was $3.6 million in 2001, an increase of $0.6 million or 18.9% over the $3.0 million reported in 2000. The majority of this increase is attributable to our growth in earning assets and deposit accounts.
Income Taxes
Income tax expense was $483,500 and $102,500 for the years ended December 31, 2001, and 2000, respectively. These expenses resulted in an effective tax rate of 41.0% in 2001, and 13.6% in 2000. The increase in effective rate in 2001 was due primarily to becoming fully taxable as a result of exhausting prior loss carry forwards.
33
Investment Portfolio
The following table summarizes the amounts and distribution of our investment securities held as of the dates indicated, and the weighted average yields as of December 31, 2001 (dollar amounts in thousands):
| | December 31, | December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | ||||||||||||||||
| | Book Value | Market Value | Weighted Average Yield | Book Value | Market Value | Weighted Average Yield | ||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||
| U.S. Treasuries: | ||||||||||||||||||
| Within One Year | $ | — | $ | — | — | $ | 8,990 | $ | 9,022 | 6.05 | % | |||||||
| One to Five Years | 8,095 | 8,286 | 5.06 | % | — | — | ||||||||||||
| Total U.S. Treasuries Securities | 8,095 | 8,286 | 5.06 | % | 8,990 | 9,022 | 6.05 | % | ||||||||||
U.S. Government and Agency Securities: | ||||||||||||||||||
| Within One Year | $ | 1,000 | $ | 1,003 | 5.30 | % | $ | 7,000 | $ | 6,983 | 5.43 | % | ||||||
| One to Five Years | 2,000 | 1,975 | 4.34 | % | 4,000 | 3,963 | 5.54 | % | ||||||||||
| Five to Ten Years | — | — | — | — | ||||||||||||||
| Total U.S. Government and Agency Securities | 3,000 | 2,978 | 4.66 | % | 11,000 | 10,946 | 5.47 | % | ||||||||||
Mutual Funds | — | — | — | — | ||||||||||||||
| Mortgage Backed Securities | — | — | — | — | ||||||||||||||
| Total Available-for-Sale Securities | $ | 11,095 | $ | 11,264 | 4.95 | % | $ | 19,990 | $ | 19,968 | 5.73 | % | ||||||
| Held-to-Maturity Securities | ||||||||||||||||||
| U.S. Treasuries: | ||||||||||||||||||
| Within One Year | $ | — | $ | — | — | $ | 998 | $ | 1,002 | 5.89 | % | |||||||
| One to Five Years | — | — | — | — | ||||||||||||||
| Total U.S. Treasuries Securities | — | — | — | 998 | 1,002 | 5.89 | % | |||||||||||
U.S. Government and Agency Securities: | ||||||||||||||||||
| Within One Year | — | — | — | — | ||||||||||||||
| One to Five Years | — | — | — | — | ||||||||||||||
| Five to Ten Years | — | — | — | — | ||||||||||||||
| After Ten Years | — | — | — | — | ||||||||||||||
| Total U.S. Government and Agency Securities | — | — | — | — | ||||||||||||||
Mortgage Backed Securities | — | — | — | — | ||||||||||||||
| Total Held-to-Maturity Securities | $ | — | $ | — | — | $ | 998 | $ | 1,002 | 5.89 | % | |||||||
Securities may be pledged to meet security requirements imposed as a condition to accepting deposits of public funds and other purposes. At December 31, 2001 and 2000, the carrying values of securities pledged to secure public deposits and other purposes were $1 million.
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Loan Portfolio
The following table sets forth the components of total net loans outstanding in each category at the date indicated (dollar amounts in thousands):
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | |||||||
| Loans | |||||||||
| Commercial | $ | 15,061 | $ | 13,263 | |||||
| Real Estate—Construction | 5,738 | 6,262 | |||||||
| Real Estate—Other | 31,064 | 23,430 | |||||||
| Consumer | 25,055 | 19,166 | |||||||
| Total Loans | 76,918 | 62,121 | |||||||
| Net Deferred Loan Costs (Fees) | (275 | ) | (221 | ) | |||||
| Allowance for Loan Losses | (850 | ) | (700 | ) | |||||
| Net Loans | $ | 75,793 | $ | 61,200 | |||||
| Commitments | |||||||||
Standby Letters of Credit | $ | 2,020 | $ | 720 | |||||
| Undisbursed Loans and Commitments to Grant Loans | 20,354 | 16,566 | |||||||
| Total Commitments | $ | 22,374 | $ | 17,286 | |||||
Risk Elements
We assess and manage credit risk on an ongoing basis through our lending policies. We strive to continue our historically low level of credit losses by continuing our emphasis on credit quality in the loan approval process, active credit administration and regular monitoring.
In extending credit and commitments to borrowers, we generally require collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow or from proceeds from the sale of selected assets of the borrower. Our requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with our evaluation of the credit worthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. We secure our collateral by perfecting our interest in business assets, obtaining deeds of trust, or outright possession among other means.
We believe that our lending policies and underwriting standards will tend to minimize losses in an economic downturn, however, there is no assurance that losses will not occur under such circumstances.
The following table shows the maturity distribution of the fixed rate portion of the loan portfolio and the repricing distribution of the variable rate portion of the loan portfolio at December 31, 2001:
| 3 Months or Less | Over 3 Months through 12 months | Due after one year to five years | Due after five years | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| $ | 60,309 | $ | 1,909 | $ | 5,977 | $ | 8,668 | $ | 76,863 | ||||
| Loans on Non-Accrual | 55 | ||||||||||||
| Total Loans, including Loans Held for Sale | $ | 76,918 | |||||||||||
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Nonperforming Assets
The following table provides information with respect to the components of our nonperforming assets at the dates indicated (dollar amounts in thousands):
| | For the Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | |||||
| Loans 90 Days Past Due and Still Accruing | $ | — | $ | — | |||
| Nonaccrual Loans | 55 | — | |||||
Total Nonperforming Loans | 55 | — | |||||
Other Real Estate Owned | — | — | |||||
Total Nonperforming Assets | $ | 55 | $ | — | |||
Nonperforming Loans as a Percentage of Total Loans | 0.07 | % | 0.00 | % | |||
| Allowance for Loan Loss as a Percentage of Nonperforming Loans | 6.47 | % | n/a | ||||
| Nonperforming Assets as a Percentage of Total Assets | 0.05 | % | 0.00 | % | |||
Nonaccrual loans are generally past due 90 days or are loans that we believe the interest on which may not be collectible. Loans past due 90 days will continue to accrue interest only when we believe the loan is both well-secured and in the process of collection.
Provision And Allowance For Loan Losses
The allowance for loan losses is maintained at a level that is considered adequate to provide for the loan losses inherent in our loans. The provision for loan losses was $207,000 in 2001 compared to $300,000 in 2000.
The following table summarizes, for the years indicated, changes in the allowances for loan losses arising from loans charged-off, recoveries on loans previously charged-off, and additions to the
36
allowance which have been charged to operating expenses and certain ratios relating to the allowance for loan losses (dollar amounts in thousands):
| | For the Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | ||||||
| Outstanding Loans: | ||||||||
| Average for the Year | $ | 69,643 | $ | 54,094 | ||||
| End of the Year | $ | 76,918 | $ | 62,121 | ||||
| Allowance For Loan Losses: | ||||||||
| Balance at Beginning of Year | $ | 700 | $ | 400 | ||||
| Actual Charge-Offs: | ||||||||
| Commercial | — | — | ||||||
| Consumer | 63 | — | ||||||
| Real Estate | — | — | ||||||
| Total Charge-Offs | 63 | — | ||||||
| Less Recoveries: | ||||||||
| Commercial | — | — | ||||||
| Consumer | 6 | — | ||||||
| Real Estate | — | — | ||||||
| Total Recoveries | 6 | — | ||||||
| Net Loans Charged-Off | 57 | — | ||||||
| Provision for Loan Losses | 207 | 300 | ||||||
| Balance at End of Year | $ | 850 | $ | 700 | ||||
| Ratios: | ||||||||
| Net Loans Charged-Off to Average Loans | 0.08 | % | 0.00 | % | ||||
| Allowance for Loan Losses to Total Loans | 1.11 | % | 1.13 | % | ||||
| Net Loans Charged-Off to Beginning Allowance for Loan Losses | 8.14 | % | 0.00 | % | ||||
| Net Loans Charged-Off to Provision for Loan Losses | 27.54 | % | 0.00 | % | ||||
| Allowance for Loan Losses to Nonperforming Loans | 6.47 | % | n/a | |||||
Management of the Bank believes that the allowance for loan losses is adequate. Quarterly detailed reviews are performed to identify the risks inherent in the loan portfolio, assess the overall quality of the loan portfolio and to determine the adequacy of the allowance for loan losses and the related provision for loan losses to be charged to expense. These systematic reviews follow the methodology set forth by the FDIC in its 1993 policy statement on the allowance for loan losses.
A key element of our methodology is the credit classification process. Loans identified as less than "acceptable" are reviewed individually to estimate the amount of probable losses that need to be included in the allowance. These reviews include analysis of financial information as well as evaluation of collateral securing the credit. Additionally, we consider the inherent risk present in the "acceptable" portion of the loan portfolio taking into consideration historical losses, economic conditions, and other relevant factors that may affect repayment of the loans in these pools.
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The following table summarizes the allocation of the allowance for loan losses by loan type for the years indicated and the percent of loans in each category to total loans (dollar amounts in thousands):
| | December 31, 2001 | December 31, 2000 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amount | Loan Percent | Amount | Loan Percent | |||||||
| Commercial | $ | 62 | 19.6 | % | $ | 47 | 21.4 | % | |||
| Construction | 37 | 7.5 | % | 39 | 10.1 | % | |||||
| Real Estate | 471 | 40.4 | % | 136 | 37.7 | % | |||||
| Consumer | 56 | 32.6 | % | 18 | 30.8 | % | |||||
| Unallocated | 224 | n/a | 460 | n/a | |||||||
| $ | 850 | 100.0 | % | $ | 700 | 100.0 | % | ||||
Funding
Deposits are our primary source of funds. At December 31, 2001, we had a deposit mix of 43.3% in time and savings deposits, 32.9% in money market and NOW deposits, and 23.8% in noninterest-bearing demand deposits. Our net interest income is enhanced by our percentage of noninterest-bearing deposits.
The following table summarizes the distribution of average deposits and the average rates paid for the years indicated (dollar amounts in thousands):
| | December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | |||||||||
| | Average Balance | Average Rate | Average Balance | Average Rate | |||||||
| Money Market and NOW Accounts | $ | 30,801 | 2.64 | % | $ | 25,312 | 3.66 | % | |||
| Savings Deposits | 3,973 | 2.34 | % | 3,320 | 2.83 | % | |||||
| TCD Less than $100,000 | 16,014 | 4.70 | % | 15,293 | 5.38 | % | |||||
| TCD $100,000 or More | 21,925 | 4.95 | % | 17,576 | 5.67 | % | |||||
| Total Interest-Bearing Deposits | 72,713 | 3.78 | % | 61,501 | 4.61 | % | |||||
Noninterest-Bearing Demand Deposits | 21,945 | n/a | 18,711 | n/a | |||||||
| Total Average Deposits | $ | 94,658 | 2.90 | % | $ | 80,212 | 3.54 | % | |||
The scheduled maturity distribution of our time deposits of $100,000 or greater, as of December 31, 2001, were as follows (dollar amounts in thousands):
| Three Months or Less | $ | 9,152 | |
| Over Three Months to One Year | 11,575 | ||
| Over One Year to Three Years | 206 | ||
| $ | 20,933 | ||
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of the Bank's asset/liability strategy is to manage liquidity and interest rate risks to ensure the safety and soundness of the Bank and its capital base, while maintaining adequate net interest margins and spreads to provide an appropriate return to the shareholders.
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We manage the Bank's interest rate risk exposure by limiting the amount of long-term fixed rate loans we hold for investment, by increasing emphasis on shorter-term, higher yield loans, and increasing or decreasing the relative amounts of deposits.
The table below sets forth the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities as of December 31, 2001, using the interest rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or matures within its contractual terms, (dollar amounts in thousands):
| | Within Three Months | After Three Months But Within One Year | After One Year But Within Five Years | After Five Years | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest-Earning Assets: | |||||||||||||||||
| Interest Bearing Deposits | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
| Federal Funds Sold | 8,650 | — | — | — | 8,650 | ||||||||||||
| Investment Securities and FRB Stock | 1,003 | — | 10,261 | — | 11,264 | ||||||||||||
| Gross Loans | 60,309 | 1,909 | 6,032 | 8,668 | 76,918 | ||||||||||||
| $ | 69,962 | $ | 1,909 | $ | 16,293 | $ | 8,668 | $ | 96,832 | ||||||||
| Interest-Bearing Liabilities: | |||||||||||||||||
| Money Market and NOW Deposits | $ | 29,958 | $ | — | $ | — | $ | — | $ | 29,958 | |||||||
| Savings | 4,610 | — | 4,610 | ||||||||||||||
| Time Deposits | 18,194 | 18,453 | 481 | 37,128 | |||||||||||||
| $ | 52,762 | $ | 18,453 | $ | 481 | $ | — | $ | 71,696 | ||||||||
Interest Rate Sensitivity Gap | $ | 17,200 | $ | (16,544 | ) | $ | 15,812 | $ | 8,668 | $ | 25,136 | ||||||
| Cumulative Interest Rate Sensitivity Gap | $ | 17,200 | $ | 656 | $ | 16,468 | $ | 25,136 | $ | 50,272 | |||||||
Ratios Based on Total Assets: | |||||||||||||||||
| Interest Rate Sensitivity Gap | 4.86 | % | (4.68 | %) | 4.47 | % | 2.45 | % | 7.11 | % | |||||||
| Cumulative Interest Rate Sensitivity Gap | 4.86 | % | 0.19 | % | 4.66 | % | 7.11 | % | |||||||||
Liquidity refers to our ability to maintain a cash flow adequate to fund both on-balance sheet and off-balance sheet requirements on a timely and cost-effective basis. Potentially significant liquidity requirements include funding of commitments to loan clients and withdrawals from deposit accounts. The Gap ratio is the ability to reprice assets and liabilities in the changing economic environment. For instance the bank is asset sensitive within the three months allowing the bank to increase income in a rising interest rate environment. The bank then becomes liability sensitive between four months and one year which will increase interest expense in a rising interest rate environment.
CAPITAL RESOURCES
Shareholders' equity at December 31, 2001 was $7.2 million, an increase of $.8 million or 12.4% over $6.4 million at December 31, 2000. Average shareholders' equity for 2001 was $6.9 million compared to $5.8 million in 2000. Shareholder' equity increased primarily from net income of $647,000 in 2001.
In 1990, the banking industry began to phase in new regulatory capital adequacy requirements based on risk-adjusted assets. These requirements take into consideration the risk inherent in investments, loans, and other assets for both on-balance sheet and off-balance sheet items. Under these requirements, the regulatory agencies have set minimum thresholds for Tier 1 capital, total capital and leverage ratios. At December 31, 2001, the Bank's capital exceeded the Tier 1 Capital, Total Capital and Leverage Ratio's minimum regulatory requirement. The Bank was considered to be well-capitalized
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at December 31, 2001, as defined in the regulations issued by the OCC. The Bank's risk-based capital ratios, shown below as of December 31, 2001, have been computed in accordance with regulatory accounting policies. Bancorp is also subject to capital requirements similar to the bank and are the same as the bank.
| | Requirement | Actual | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | Adequately Capitalized | Well Capitalized | Bank | Company | |||||
| Total risk-based capital ratio | 8.00 | % | 10.00 | % | 10.48 | % | 10.48 | % | |
| Tier 1 risk-based capital ratio | 4.00 | % | 6.00 | % | 9.41 | % | 9.41 | % | |
| Tier 1 leverage capital ratio | 4.00 | % | 5.00 | % | 7.15 | % | 7.15 | % | |
EFFECTS OF INFLATION
The financial statements and related financial information presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or same magnitude as the price of goods and services.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142,"Accounting for Goodwill and Other Intangible Assets,"effective starting with fiscal years beginning after December 15, 2001. This Statement establishes new accounting standards for goodwill and continues to require the recognition of goodwill as an asset but does not permit amortization of goodwill as previously required by the APB Opinion No. 17. The Statement also establishes a new method of testing goodwill for impairment. It requires goodwill to be separately tested for impairment at a reporting unit level. The amount of goodwill determined to be impaired would be expensed to current operations. Management believes that the adoption of the statement will not have a material effect on the Company's consolidated financial statements.
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The Articles of Incorporation of Bancorp authorize not less than nine (9) or more than seventeen (17) directors with the exact number within that range to be fixed by resolution of the Board of Directors. The number of directors of Bancorp has been fixed at eleven(11). The Directors hold office for a term of one year continuing until the Meeting of Shareholders to be held in May, 2002 and until their successors are duly elected and qualified.
The following is a brief account of the business experience during the past five years of each director and executive officer of Bancorp. Executive officers must be selected by the Board of Directors annually as required by the bylaws of Bancorp.
Marilyn Britton, age 62, graduated from Cal Poly San Luis Obispo. She was involved with the San Luis Obispo county Farm Bureau for over 22 years, recently retiring as Executive Director, a position she held for over 16 years. Marilyn is a member and past director of the San Luis Obispo Rotary, a member of San Luis Obispo County Farm Bureau, San Luis Obispo Farm Bureau Women, San Luis Obispo County Cattlewoman's Association, San Luis Obispo County Cattleman's Association, and the San Luis Obispo County Agricultural Awareness. Mrs. Britton developed the San Luis Obispo County Farm Bureau Agriculture Tour program, 21 years ago and is continuing as its Tour Coordinator. She was also the Executive Director for the San Luis Obispo County Grain Improvement Association for 16 years. She serves on the Sheriff's Parole Board, the San Luis Obispo Native Tree Committee, and Visitor's Conference Bureau board member.
Dario A. Domenghini, age 64, is an original organizer and director. Mr. Domenghini is a life-long resident of San Luis Obispo County. His family has been involved in agriculture in the county of San Luis Obispo since the early 1920's. Mr. Domenghini has been involved in agriculture, working in his family's dairy and ranching operation since his childhood.
Mr. Domenghini expanded the operation to include vegetable farming. He has since closed down the dairy operation, but continues to farm in partnership with his nephew. Mr. Domenghini holds a1/3 ownership in the real estate interest of Domenghini Brothers and is a 50% partner in Domenghini Farms. Mr. Domenghini was educated at Cal Poly San Luis Obispo, majoring in Dairy Science. Mr. Domenghini is active in local farming and ranching activities.
John Guhring, age 62, is an original organizer and director. Mr. Guhring has been involved with the community of San Luis Obispo since the early 1960's when he attended Cal Poly San Luis Obispo. After a nine-year career in marketing on the east coast, Mr. Guhring joined in 1974 a closely held communications company, based in San Luis Obispo, and became president of the firm seven years later. This firm was sold in 1984 to Metromedia.
In 1981, Mr. Guhring co-founded TAS-Com, Inc., a firm that serves San Luis Obispo and Santa Barbara counties with telephone answering, voice mail and paging services. Mr. Guhring founded Kronos Communications, dba the Cellular Source, in 1987 when the first cellular telephone systems were deployed. TAS-Comm and the Cellular Source were merged in January 1998 to form Golden State Phone and Wireless. Golden State now has 15 retail locations from Carmel to Lompoc, and is the leading Master Agent for Verizon Wireless. The corporation is a member of the chambers of commerce in San Luis Obispo, Arroyo Grande, Santa Maria and Lompoc. Mr. Guhring is also president with 50% ownership in Golden State Phone & Wireless. Mr. Guhring is president of Alpha Sigma Alumni Association and a past president of the Santa Maria Kiwanis Club. Mr. Guhring brings to the board of directors for Coast National Bank an impressive background in starting and growing businesses into successful operations. He has had more than 25 years as a successful business owner and operator in the San Luis Obispo area.
James Kaney, age 55, is an original organizer and director. Mr. Kaney has been a business owner/operator in San Luis Obispo since 1970. Mr. Kaney graduated cum laude with a BS in Accounting/
41
Finance and a Minor in Economics at Cal Poly San Luis Obispo. Mr. Kaney started Kaney Foods, Inc. in San Luis Obispo, a wholesaler to restaurants and institutions in the counties of Monterey, Santa Barbara, Ventura, and San Luis Obispo. Mr. Kaney was responsible for all phases of the company warehousing, distribution, sales and accounting. The company was sold in 1987. Mr. Kaney is disabled and is actively involved in his investments. Mr. Kaney is an organizer, founder and past director of Commerce Bank of San Luis Obispo N.A., which was sold in March 1996 to Valliwide Bank. Mr. Kaney served for more than twelve years on the loan committee and the investment committee of Commerce Bank. Mr. Kaney is a past member of the Kiwanis Club, and a member and past director of the Rotary Club of San Luis Obispo.
Michael A. Lady, age 50, is an original organizer and director of the Bank. Mr. Lady has been a resident of Arroyo Grande for the past fifteen years and is the owner of Lady Family Mortuary in Arroyo Grande. In addition to his involvement in the mortuary business, Mr. Lady is an investor, as well as the mayor of the city of Arroyo Grande. Mr. Lady, through his development and governmental activities, is vitally aware of the future development plans for the Arroyo Grande area, including plans for the possible annexation of unincorporated lands bordering Arroyo Grande to provide the space for a major increase in commercial development in the community.
Mr. Lady is active in a large number of civic and fraternal organizations. He is the past president of the Arroyo Grande Chamber of Commerce and the Arroyo Valley Kiwanis. He is active in the Elks Club, Moose Lodge, Shriner's Club, the Freemasons, YMCA, and Fraternal Order of Eagles. He was named the 1991 Arroyo Grande Citizen of the Year, and he and his wife were named South County Couple of the Year also in 1991. Mr. Lady is a leader in the Arroyo Grande community, and his involvement in the formation and management of the Bank provides the Bank with an impressive base of valuable business customers.
Gene Mintz, age 62, is an original organizer and director of the Bank. Mr. Mintz is a business and tax advisor for the Arroyo Grande area and owner of GSM Business Services, Inc., an Arroyo Grande business and tax advisory service. A life-long resident of San Luis Obispo County, Mr. Mintz is involved in a number of civic, charitable and professional associations. He is the past president and director of the Kiwanis Club of greater Pismo Beach, and a 27 year member of the Elk's club of the Pismo Beach area. Mr. Mintz is a general partner in W.M. Associates and Mintz Brothers. He is also the Secretary/Treasurer of Lanco Development Co., Inc., in which he is also a general partner.
Mr. Mintz is active in a number of professional organizations, serving as a past president of the Central Coast Chapter of the California Society of Enrolled Agents. His professional activities include his active accounting and tax advisory business, as well as involvement in a number of real estate development projects. He is the Secretary-Treasurer of Burke and Pace, a major supplier of building materials headquartered in Arroyo Grande. Mr. Mintz is involved in the South County Performing Arts Association, as a Director and Vice President for this cultural organization.
Ron Olson, age 58, is a director of the Bank. Mr. Olson is a Certified Public Accountant and is owner of Platino Management Services, Inc., which provides accounting and tax services, management consulting and property management services in Arroyo Grande and surrounding communities.
Mr. Olson has been a resident of Arroyo Grande for 28 years and is active in local service and professional organizations. Mr. Olson is a member of the Arroyo Grande Optimists Club and of both the American Institute of CPA's and the California Society of CPA's. Mr. Olson is an investor and director of a privately held chain of food supermarkets and a fast food restaurant franchising company.
Jack W. Robasciotti, age 74, is Vice Chairman of the board and an original organizing director of the Bank. Mr. Robasciotti was born in San Luis Obispo and has been active in banking since 1951. After an impressive 33 year career with Bank of America, Mr. Robasciotti "retired" to San Luis
42
Obispo, where he worked for 12 years as the manager of the San Luis Obispo main office for Commerce Bank of San Luis Obispo N.A.
Mr. Robasciotti is extremely active in a number of civic, charitable and fraternal organizations in San Luis Obispo. His activities range from fundraising for the YMCA, to serving as directors of organizations that provide shelter for abused women, that seek to increase public awareness of sexual abuse (SAVE), and that counsel pregnant women at risk (ALPHA). Mr. Robasciotti is active in local historical societies, previously serving as 1st vice president of the San Luis Obispo County Historical Society, as a director of the Hearst Castle Lighting Committee and as a committee member for a number of the San Luis Obispo Mission operating groups. He is active in the Rotary and other non-profit organizations.
Thomas J. Sherman age 42, and is Executive Vice President, Chief Financial Officer, and a director of Bancorp and President, Chief Operating Officer, and a Director of the Bank. He was raised and educated in San Luis Obispo, graduating from Cal Poly San Luis Obispo. He has been in commercial lending for the past 15 years and is a graduate of the Stonier Graduate School of Banking at the University of Delaware as well as the California Banking School at the University of San Diego. Mr. Sherman is active in a number of civic, professional and charitable organizations. He is presently a member of the Exchange Club, the Sheriff's Advisory Council and is treasurer and board member of the Women's Shelter Program of San Luis Obispo. Mr. Sherman was formerly a board member of Friendship School, Foundation for Community Design and United Cerebral Palsy. He was also involved with the Muscular Dystrophy Association and SLO Babe Ruth Baseball.
Jack C. Wauchope, age 66, is Chairman of the Board of Directors, President, and Chief Executive Officer of Bancorp, and Chairman of the Board of Directors and Chief Executive Officer of the Bank. Mr. Wauchope has been in the banking industry for more than 42 years. For more than half of that time, he has served as the President and Chief Executive Officer of independent banks. Mr. Wauchope was the organizing President of Commerce Bank of San Luis Obispo. During his ten-year term at Commerce the bank earned consistently high CAMEL ratings and was named a Premier Performing Bank for seven consecutive years. He is a graduate of Pacific Coast Banking School at the University of Washington in Seattle, Washington as well as Millikin University, Decatur, Illinois.
Mr. Wauchope has served on the boards of numerous civic, charitable and trade organizations which include the Foundation for the Performing Arts Center, Hotline of San Luis Obispo County, San Luis Obispo Economics Forecast Project, Community Bankers of Southern California, Western Banking School, Rotary Club of San Luis Obispo Daybreak and The Civic Ballet of San Luis Obispo.
Dan H. Wixom, age 51, is an original organizer and director of the Bank. Mr. Wixom is a rancher and an owner/operator of Wixom Trucking, LLC. Mr. Wixom formerly owned and operated Wixom Concrete, Inc., which was sold in 1997. A graduate of Cal Poly San Luis Obispo in Agriculture Management, Mr. Wixom is a fourth generation resident of San Luis Obispo County. He has been a member of Native Sons of the Golden West for twenty years and served as a president of the organization. He also has served on the board of the Morro Bay Community Foundation. The foundation helps with youth activities in the Central Coast. He supports local educational institutions, volunteering time and donating materials for the Morro Bay FFA Club and for youth sports teams.
Mr. Wixom is a member of the California Cattlemen's Association, the National Cattlemen's Association, and the San Luis Obispo County Farm Bureau. He has operated his own calf/cow operation for more than 30 years. Currently he runs over 300 mother cows on over 4,000 acres, with an additional 100 acres set-aside for oat and hay production. His trucking company is involved in the statewide transportation of construction aggregates, bulk cement and livestock.
43
Jack C. Wauchope—Chairman and Chief Executive Officer—See "Directors"
Thomas J. Sherman—President, Chief Operating Officer.—See "Directors"
Jack Robasciotti—Vice-Chairman of the Board—See "Directors"
The executive officers were each elected by the Board of Directors. There are no family relationships between directors and executive officers of the Bank.
No Director of the Bank holds a directorship in any other company with a class of securities registered pursuant to Section 12 of the Securities Exchange of 1934, as amended.
The chart below contains information of Jack C. Wauchope and Thomas J. Sherman as the only executive officers whose salary and other compensation was $100,000 or more during the years ended December 31, 2001, 2000, and 1999.
| Name and Principal Position | Year | Salary($) | Bonus($) | Other Annual Compensation ($) | Awards: Securities Underlying Options(#) | All Other Compensation | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jack C. Wauchope | 2001 | $ | 143,750 | $ | 6,000 | $ | — | — | $ | 10,341 | ||||||
| President and CEO of Bancorp | 2000 | $ | 128,750 | $ | — | $ | — | — | $ | 8,356 | ||||||
| 1999 | $ | 115,833 | $ | — | $ | — | — | $ | 4,762 | |||||||
Thomas J. Sherman | 2001 | $ | 115,833 | $ | 6,000 | $ | — | — | $ | 1,926 | ||||||
| Executive Vice President and | 2000 | $ | 105,833 | $ | — | $ | — | — | $ | 1,896 | ||||||
| Chief Financial Officer of Bancorp | 1999 | $ | 95,833 | $ | — | $ | — | — | $ | 1,896 | ||||||
The value of perquisites and other personal benefits are disclosed in other annual compensation if they exceed, in the aggregate, the lesser of $50,000 or 10% of salary and bonus. No amounts are reported in this column for Mr. Wauchope or Mr. Sherman since the value of perquisites and other personal benefits did not exceed the reporting threshold.
The Bank employs Jack C. Wauchope as its Chairman and Chief Executive Officer and entered into an employment agreement with him, which took effect in June 2000. The agreement provided for a term of three years at an annual base salary of $135,000.00 in year 1, $150,000.00 in year 2 and $165,000.00 in year 3, discretionary bonuses, and an automobile allowance of $500.00 per month, expense reimbursement, $400,000.00 of life insurance and standard and customary medical and dental insurance benefits. Additionally, Mr. Wauchope will be entitled to severance benefits equal to one year's base salary upon the occurrence of one or more enumerated events.
The Bank employs Thomas Sherman as its President and Chief Operating Officer and entered into an employment agreement with him, which took effect in June 2000. The agreement provides for a term of three years at an annual base salary of $110,000.00 in year 1, $120,000.00 in year 2 and $130,000.00 in year 3, discretionary bonuses, and an automobile allowance of $400.00 per month, expense reimbursement, $200,000.00 of life insurance and standard and customary medical and dental insurance benefits. Additionally, Mr. Sherman will be entitled to severance benefits equal to one year's base salary upon the occurrence of one or more enumerated events.
The directors who are not full-time employees of the Bank are presently receiving monthly directors' fees. Wauchope and Sherman do not presently receive directors' fees.
44
There were no other executive officers whose annual salary and other annual compensation exceeded $100,000 for 2001.
Employees Stock Option Plan
In the course of the formation of Coast Bancorp as of May 31, 2001, Coast Bancorp adopted and assumed the Coast National Bank 1997 Stock Option Plan, now known as the Coast Bancorp Employee Stock Option Plan. The Employee Plan was adopted to strengthen the Company and its subsidiaries by providing eligible full-time officers and employees an added incentive to perform at a high level and to reward extraordinary efforts to increase the earnings of Coast Bancorp and its subsidiaries. The incentive will take the form of an opportunity for officers and employees of Coast Bancorp and its subsidiaries to acquire a proprietary interest in the success of Coast Bancorp by purchasing shares of Coast Bancorp common stock.
117,600 shares of Coast Bancorp common stock may be issued pursuant to the exercise of Options granted under the Employee Plan, and in no event may the total number of shares issuable upon exercise of all outstanding options and the total number of shares provided for under any other stock option plan, stock bonus or similar plan of Coast Bancorp exceed thirty percent (30%) of the then-outstanding common stock of the Company. As of March 19, 2002, approximately twenty officers and employees of Coast Bancorp and its affiliates were eligible to hold options to purchase under the Employee Plan. The Employee Plan contemplates the grant of incentive stock options and nonstatutory stock options.
The Employee Plan is not qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") or subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended.
Exercise and Grant of Options
During 2001 no options were granted to Jack C. Wauchope or to Thomas J. Sherman.
The following table shows exercises of stock options during fiscal year 2001 by Jack C. Wauchope or by Thomas J. Sherman and the value at December 31, 2001 of unexercised options on an aggregated basis held by each such persons:
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
| Name | Shares Acquired On Exercise (#) | Value Realized($) | Number of Securities Underlying Unexercised Options at FY-End(#) Exercisable/Unexercisable | Value of Unexercised In-the-Money Options at FY-End ($) Exercisable/Unexercisable | |||||
|---|---|---|---|---|---|---|---|---|---|
| Jack C. Wauchope | 0 | 0 | 16,000/4,000 | $ | 105,440/$26,360 | ||||
Thomas J. Sherman | 0 | 0 | 16,000/4,000 | $ | 105,440/$26,360 | ||||
45
Directors Stock Option Plan
In the course of the formation of Coast Bancorp as of May 31, 2001, Coast Bancorp adopted and assumed the Coast National Bank 1998 Directors' Stock Option Plan, now known as the Coast Bancorp Directors Stock Option Plan (the "Director Plan"). The Director Plan was adopted to offer the non-employee directors of Coast Bancorp and its affiliates the opportunity to acquire a proprietary interest in the success of Coast Bancorp by purchasing shares of Coast Bancorp common stock.
The aggregate number of shares which may be issued pursuant to the exercise of Options granted under the Director Plan is 62,500 shares, and in no event may the total number of shares issuable upon exercise of all outstanding options and the total number of shares provided for under any other stock option plan, stock bonus or similar plan of Coast Bancorp exceed thirty percent (30%) of the then-outstanding common stock of the Company ("the Shares"). As of March 19, 2002, approximately nine (9) directors of Coast Bancorp and its affiliates were eligible to hold options under the Director Plan. The Director Plan contemplates the grant of nonstatutory stock options only.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no existing or proposed material interests or transactions between the Bank and/or any of it's officers or directors outside the ordinary course of the Bank's business. It is anticipated that the directors and officers of the Bank, and the companies, with which they are associated, will have banking transactions with the Bank in the ordinary course of business. It is the firm intention of the Board of Directors that any loans and commitments to lend included in such transactions will be made in accordance with all applicable laws and regulations and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar creditworthiness. It is also possible that one or more members of the Board of Directors may from time to time provide services and equipment to the Bank. It is the firm policy of the Board that any such transactions between the Bank and any members of its Board, or any person directly or indirectly related to a director, be made in strict accordance with applicable rules and regulations and on substantially the same terms as those available at the time for comparable transactions with disinterested persons.
46
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 31, 2002 as to common shares beneficially owned by the directors of Bancorp and each executive officer named in the Summary of Compensation Table elsewhere in this prospectus, as well as all directors and principal officers of Bancorp as a group. Ownership information is based upon information furnished by the individuals listed. Except for Jack C. Wauchope, there are no shareholders with ownership of 5% or more of Bancorp's stock Mr. Wauchope's address is 553 B Higuera St., San Luis Obispo, CA 93401.
| Name | Relationship to Bancorp | Number of Shares | Percentage Owned(1) | ||||
|---|---|---|---|---|---|---|---|
| Jack C. Wauchope | President, Chief Executive Officer & Chairman of the Board | 42,300 | (2) | 6.48 | % | ||
| Marilyn Britton | Director | 1,384 | (8) | 0.22 | % | ||
| Dario Domenghini | Director | 11,400 | (3,6) | 1.79 | % | ||
| John F. Guhring | Corporate Secretary & Director | 16,500 | (6) | 2.59 | % | ||
| James M. Kaney | Director | 7,700 | (6) | 1.21 | % | ||
| Michael A. Lady | Director | 6,000 | (6) | 0.94 | % | ||
| Gene D. Mintz | Director | 25,140 | (6) | 3.94 | % | ||
| Ronald Olson | Director | 10,700 | 1.69 | % | |||
| Jack W. Robasciotti | Director | 7,000 | (6) | 1.10 | % | ||
| Thomas J. Sherman | Executive Vice President, Chief Financial Officer & Director | 30,000 | (2,4) | 4.60 | % | ||
| Dan H. Wixom | Director | 16,800 | (5,6) | 2.64 | % | ||
| Director & Executive Officers as a Group (11 persons) | 174,924 | (7) | 24.70 | % |
47
General
Bancorp currently has an authorized capitalization of 10,000,000 shares of common stock and 10,000,000 shares of preferred stock. Of these authorized capital shares, 632,400 shares of common stock and no shares of preferred stock are currently issued and outstanding. An additional 180,100 shares of Bancorp's common stock is reserved for issuance under to Bancorp's stock option plans.
Common Stock
The balance of Bancorp's authorized common stock will be available to be issued when and as the Board of Directors of Bancorp determines it advisable to do so. Common shares could be issued for the purpose of raising additional capital, in connection with acquisitions or formation of other businesses, or for other appropriate purposes. The Board of Directors of Bancorp has the authority to issue common shares to the extent of the present number of authorized unissued shares, without obtaining the approval of existing holders of common shares. If additional shares of Bancorp "s common stock were to be issued, the existing holders of Bancorp shares would own a proportionately smaller portion of the total number of issued and outstanding common shares.
Dividend Rights
The shareholders of Bancorp are entitled to receive dividends when and as declared by its Board of Directors out of funds legally available, subject to the restrictions set forth in the California General Corporation Law. The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows:
It is contemplated that Bancorp will pay cash and stock dividends subject to the restrictions on payment of cash dividends as allowed, based on the earnings of Bancorp, management's assessment of the future capital needs, and other factors. Initially, the funds for payment of dividends and expenses of Bancorp are expected to be obtained from dividends paid by its wholly-owned subsidiary, Coast National Bank.
Voting Rights
All voting rights with respect to Bancorp are vested in the holders of Bancorp's common stock.
Holders of Bancorp common stock are entitled to one vote for each share held except that in the election of directors each shareholder has cumulative voting rights and is entitled to a number of votes equal to the number of shares held by the shareholder multiplied by the number of directors to be elected and a shareholder may cast all his or her votes for a single candidate or distribute votes among any or all of the candidates he or she chooses. However, no shareholder will be entitled to cumulate votes (in other words, cast for any candidate a number of votes greater than the number of shares of stock held by such shareholder) unless such candidate or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting
48
of the shareholder's intention to cumulate votes. If any shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination.
Preemptive Rights
Shareholders of Bancorp common stock have no preemptive rights. Also there are no applicable conversion rights, redemption rights or sinking fund provisions.
Liquidation Rights
Upon liquidation of Bancorp, the shareholders of Bancorp "s common stock have the right to receive their pro rata portion of the assets of the Bancorp distributable to shareholders. This is subject, however, to the preferential rights, if any, of the holders of any outstanding senior securities. Presently there are no senior securities outstanding.
Preferred Stock
Bancorp is authorized to issue 10,000,000 shares of preferred stock. The Board of Directors has the authority to establish preferred stock in one or more series and to fix the dividend rights (including sinking fund provisions), redemption price or prices, and liquidation preferences, and the number of shares constituting any series or the designation of such series. Holders of preferred stock, when and if issued, may become senior to holders of common stock as to dividend, voting, liquidation or other rights. The Board of Directors has no present intention to issue shares of preferred stock.
Provisions of Articles of Incorporation
Certain provisions of the articles and the bylaws of Bancorp may have the effect of delaying, deferring or preventing a change in control of Bancorp in certain circumstances. Some of these provisions, which do not contemplate a specific or particular attempt to gain control of Bancorp are described below. The Articles of Incorporation and the Bylaws are available upon request of Bancorp. The following discussion is qualified in its entirety by the specific provisions of the articles and bylaws.
Issuance of Additional Securities
The articles of incorporation permit the Board of Directors to issue additional shares of common stock and shares of preferred stock without the prior approval of the holders of Bancorp common stock. The issuance of additional common stock, preferred stock or other securities permitted by the articles of incorporation at some future date may have the effect of delaying, deferring or preventing a change in control of Bancorp
Approval of Certain Business Combinations
The articles of incorporation provide that:
must be approved by holders of 662/3% of the outstanding shares of Bancorp common stock. This provision can only be amended or repealed by the affirmative vote of the holders of 662/3% of the outstanding shares of Bancorp common stock.
49
Bancorp "s common stock issuable in this offering has been registered under the Securities Act of 1933, as amended, but this registration does not cover resales of shares acquired by any Bancorp shareholder who is deemed to be an "affiliate" of Bancorp, that is one who directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with Bancorp. Affiliates may not sell the shares except pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act.
The validity of the shares being offered has been reviewed for Bancorp by Nixon Peabody LLP, Two Embarcadero Center, Suite 2700, San Francisco, California 94111. However, subscribers should not construe this review as constituting an opinion on the merits of the offering.
The audited consolidated balance sheets of Coast Bancorp as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the two years ended December 31, 2001 included in this prospectus and elsewhere in the Form SB-2 registration statement have been audited by Vavrinek, Trine Day & Company LLP, independent public accountants, as indicated in their report (dated January 3, 2002) with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report.
Bancorp provides shareholders with an annual report containing audited financial statements. Coast National Bank's Call Reports, as required by the Federal Financial Institutions Examination Council, are available at www.fdic.gov.
50
| | | | Page | ||
|---|---|---|---|---|---|
| FINANCIAL STATEMENTS | |||||
A. | UNAUDITED INTERIM FINANCIAL STATEMENTS | ||||
Consolidated Balance Sheets | F-2 | ||||
Consolidated Statements of Income | F-3 | ||||
Consolidated Statement of Changes in Stockholders' Equity | F-4 | ||||
Consolidated Statements of Cash Flows | F-5 | ||||
Notes to Unaudited Financial Statements | F-6 | ||||
B. | AUDITED FINANCIAL STATEMENTS | ||||
Independent Accountants Report | F-7 | ||||
Consolidated Balance Sheets | F-8 | ||||
Consolidated Statements of Income | F-9 | ||||
Consolidated Statement of Changes in Stockholders' Equity | F-10 | ||||
Consolidated Statements of Cash Flows | F-11 | ||||
Notes to Consolidated Financial Statements | F-12 to F-26 | ||||
F-1
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)
| | March 31, 2002 | ||||||
|---|---|---|---|---|---|---|---|
| ASSETS | |||||||
Cash and due from banks | $ | 4,041 | |||||
| Federal funds sold | 5,640 | ||||||
| TOTAL CASH AND CASH EQUIVALENTS | 9,681 | ||||||
Interest-bearing deposits | — | ||||||
| Investment securities: | |||||||
| Securities held to maturity | — | ||||||
| Securities available for sale | 8,124 | ||||||
| TOTAL INVESTMENT SECURITIES | 8,124 | ||||||
| Loans: | |||||||
| Commercial | 12,630 | ||||||
| Real estate—construction | 5,305 | ||||||
| Real estate—other | 36,473 | ||||||
| Consumer | 27,021 | ||||||
| TOTAL LOANS | 81,429 | ||||||
Net deferred loan fees | (391 | ) | |||||
| Allowance for credit losses | (875 | ) | |||||
| NET LOANS | 80,163 | ||||||
Premises and equipment | 4,431 | ||||||
| Deferred taxes | 130 | ||||||
| Federal reserve bank stock, at cost | 189 | ||||||
| Other assets | 791 | ||||||
| TOTAL ASSETS | $ | 103,509 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Deposits: | |||||||
| Noninterest-bearing demand | $ | 24,607 | |||||
| Money market and NOW | 29,297 | ||||||
| Savings | 5,180 | ||||||
| Time deposits of $100,000 or more | 20,577 | ||||||
| Other time deposits | 15,761 | ||||||
| TOTAL DEPOSITS | 95,422 | ||||||
Notes payable | 732 | ||||||
| Other liabilities | 130 | ||||||
| TOTAL LIABILITIES | 96,284 | ||||||
| Commitments and contingencies—Note #4 and #11 | |||||||
Stockholders' equity | |||||||
| Preferred stock—10,000,000 authorized, none outstanding | |||||||
| Common stock no par value; 10,000,000 shares authorized; issued and outstanding: 632,400 in 2001 and 627,000 in 2000 | 6,324 | ||||||
| Additional paid-in capital | |||||||
| Retained earnings | 868 | ||||||
| Accumulated other comprehensive income—net unrealized (losses) gains on available-for-sale securities | 33 | ||||||
| TOTAL STOCKHOLDERS' EQUITY | 7,225 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 103,509 | |||||
F-2
CONSOLIDATED STATEMENT OF INCOME (unaudited)
(In Thousands, except for per share numbers)
| | For the Three Months Ended March 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | |||||
| Interest income: | |||||||
| Interest and fees on loans | $ | 1,416 | $ | 1,506 | |||
| Interest on taxable securities | 99 | 243 | |||||
| Interest on federal funds sold | 26 | 99 | |||||
| Other interest income | 3 | 8 | |||||
| Total interest income | 1,544 | 1,856 | |||||
Interest expense: | |||||||
| Interest on money market and NOW accounts | 89 | 267 | |||||
| Interest on savings deposits | 15 | 22 | |||||
| Interest on time deposits | 291 | 523 | |||||
| Interest on other borrowings | 9 | 5 | |||||
| 404 | 817 | ||||||
Net interest income | 1,140 | 1,039 | |||||
| Provision for loan losses | 20 | 25 | |||||
| Net interest income after provision for loan losses | 1,120 | 1,014 | |||||
Noninterest income: | |||||||
| Service charges on deposit accounts and other | 53 | 61 | |||||
| Gain on sale of loans and servicing fees | 0 | 0 | |||||
| Gain on sale of securities | 58 | 14 | |||||
| Total noninterest income | 111 | 75 | |||||
Noninterest expense: | |||||||
| Salaries and benefits | 560 | 459 | |||||
| Net occupancy expense (net of rental income) | 72 | 42 | |||||
| Equipment expense | 49 | 43 | |||||
| Other expense | 311 | 295 | |||||
| Total noninterest expense | 992 | 839 | |||||
Income before taxes | 239 | 250 | |||||
| Income taxes | 103 | 104 | |||||
| Net income | $ | 136 | $ | 146 | |||
| Earnings per share—Basic | $ | 0.22 | $ | 0.23 | |||
| Earnings per share—Diluted | $ | 0.20 | $ | 0.23 | |||
F-3
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Number of Shares) (Unaudited)
| | Common Stock | | | | | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Accumulated Other Comprehensive Income | | |||||||||||||||
| | Number of Shares | Amount | Comprehensive Income | Retained Earnings | Total | ||||||||||||||
| Balance at January 1, 2001 | 627,000 | $ | 6,270 | $ | 116 | $ | (22 | ) | 6,364 | ||||||||||
| Exercise of stock options | 5,400 | 54 | 54 | ||||||||||||||||
| Cash dividends | $ | (32 | ) | (32 | ) | ||||||||||||||
| Comprehensive Income | |||||||||||||||||||
| Net income | $ | 648 | 648 | 648 | |||||||||||||||
| Unrealized gain on securities available for sale | 178 | 178 | 178 | ||||||||||||||||
| Reclassification adjustment for gain on Sale of investment securities included in net income | (56 | ) | (56 | ) | (56 | ) | |||||||||||||
| Total comprehensive income | $ | 770 | |||||||||||||||||
| Balance at December 31, 2001 | 632,400 | 6,324 | 732 | 100 | 7,156 | ||||||||||||||
| Exercise of stock options | — | ||||||||||||||||||
| Cash dividends | — | ||||||||||||||||||
| Comprehensive Income | |||||||||||||||||||
| Net income | $ | 136 | 136 | 136 | |||||||||||||||
| Unrealized loss. on securities available for sale | (33 | ) | (33 | ) | (33 | ) | |||||||||||||
| Reclassification adjustment for gain on Sale of investment securities included in net income | (34 | ) | (34 | ) | (34 | ) | |||||||||||||
| Total comprehensive income | $ | 69 | |||||||||||||||||
| Balance at March 31, 2002 | 632,400 | $ | 6,324 | $ | 868 | $ | 33 | $ | 7,225 | ||||||||||
F-4
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
(In Thousands)
| | For the Three Months Ended March 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | 136 | $ | 146 | |||||||
| Adjustments to reconcile net income to | |||||||||||
| Net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 52 | 49 | |||||||||
| Provision for loan losses | 20 | 25 | |||||||||
| Realized gain on investment securities | (58 | ) | (14 | ) | |||||||
| Other items—net | (4 | ) | 198 | ||||||||
| Net cash provided by operating activities | 146 | 404 | |||||||||
Investing activities | |||||||||||
| Change in interest-bearing deposits | — | 200 | |||||||||
| Proceeds from sale of investment securities | 2,071 | 3,008 | |||||||||
| Maturities of investment securities | 1,000 | 6,000 | |||||||||
| Net change in loans | (4,389 | ) | (3,396 | ) | |||||||
| Purchase of premises and equipment | (589 | ) | (44 | ) | |||||||
| Net cash provided (used) by investing activities | (1,907 | ) | 5,768 | ||||||||
Financing activities | |||||||||||
| Increase in deposits | (1,104 | ) | 4,781 | ||||||||
| Proceeds from exercise of 0ptions | (3 | ) | 30 | ||||||||
| Net cash provided by financing activities | (1,107 | ) | 4,811 | ||||||||
| Increase in cash and cash equivalents | (2,868 | ) | 10,983 | ||||||||
Cash and cash equivalents at beginning of period | 12,549 | 9,543 | |||||||||
| Cash and cash equivalents at end of period | $ | 9,681 | $ | 20,526 | |||||||
F-5
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1—Basis of Presentation
The accompanying financial information has been prepared in accordance with the Securities and Exchange Commission rules and regulations for quarterly reporting and therefore does not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. This information should be read in conjunction with the Company's audited financial statements as of and for the years ended December 31, 2001 and 2000 contained elsewhere in this prospectus.
Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. In the opinion of management, the unaudited financial information for the three month period ended March 31, 2002 and 2001, reflect all adjustments, consisting only of normal recurring accruals and provisions, necessary for a fair presentation thereof.
Some matters discussed in this prospectus may be "forward-looking statements" within the meaning of the Private Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause our actual results to be materially different from the results expressed or implied by our forward-looking statements. These statements generally appear with words such as "anticipate", "believe", "estimate", "may", "intend", and "expect".
Note 2—Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128,"Earnings per Share". Accordingly, basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share also considers the number of shares issuable upon the assumed exercise of outstanding common stock options. All earnings per common share amounts presented have been restated in accordance with the provisions of this statement.
| | For the Three Months Ended March 31, | |||||
|---|---|---|---|---|---|---|
| | 2002 | 2001 | ||||
| Earnings per share—Basic | $ | 0.22 | $ | 0.23 | ||
| Earnings per share—Diluted | $ | 0.20 | $ | 0.23 | ||
F-6
Board of Directors and Stockholders of
Coast Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheets of Coast Bancorp and Subsidiary as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. 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 auditing standards generally accepted in the United States of America. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Coast Bancorp and Subsidiary as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ VAVRINEK, TRINE, DAY & CO., LLP
Laguna Hills, California
January 3, 2002
F-7
COAST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000
| | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||
Cash and due from banks | $ | 3,898,648 | $ | 6,043,230 | ||||||
| Federal funds sold | 8,650,000 | 3,500,000 | ||||||||
| TOTAL CASH AND CASH EQUIVALENTS | 12,548,648 | 9,543,230 | ||||||||
| Interest-bearing deposits | — | 200,000 | ||||||||
Investment securities: | ||||||||||
| Securities held to maturity | — | 997,662 | ||||||||
| Securities available for sale | 11,263,985 | 19,967,986 | ||||||||
| TOTAL INVESTMENT SECURITIES | 11,263,985 | 20,965,648 | ||||||||
Loans: | ||||||||||
| Commercial | 15,061,423 | 13,262,406 | ||||||||
| Real estate—construction | 5,737,652 | 6,261,763 | ||||||||
| Real estate—other | 31,064,343 | 23,430,266 | ||||||||
| Consumer | 25,054,632 | 19,166,309 | ||||||||
| TOTAL LOANS | 76,918,050 | 62,120,744 | ||||||||
| Net deferred loan fees | (274,525 | ) | (220,717 | ) | ||||||
| Allowance for credit losses | (850,000 | ) | (700,000 | ) | ||||||
| NET LOANS | 75,793,525 | 61,200,027 | ||||||||
| Premises and equipment | 3,893,801 | 3,610,995 | ||||||||
| Deferred taxes | 213,000 | 189,000 | ||||||||
Federal reserve bank stock, at cost | 189,400 | 171,950 | ||||||||
| Accrued interest and other assets | 724,245 | 965,012 | ||||||||
| TOTAL ASSETS | $ | 104,626,604 | $ | 96,845,862 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
Deposits: | ||||||||||
| Noninterest-bearing demand | $ | 24,830,883 | $ | 21,397,548 | ||||||
| Money market and NOW | 29,958,130 | 29,631,840 | ||||||||
| Savings | 4,610,220 | 3,190,881 | ||||||||
| Time deposits of $100,000 or more | 20,932,089 | 19,998,497 | ||||||||
| Other time deposits | 16,195,411 | 15,731,238 | ||||||||
| TOTAL DEPOSITS | 96,526,733 | 89,950,004 | ||||||||
| Notes payable | 735,073 | 245,182 | ||||||||
| Other liabilities | 208,529 | 286,429 | ||||||||
| TOTAL LIABILITIES | 97,470,335 | 90,481,615 | ||||||||
| Commitments and contingencies—Note # 4 and #11 | ||||||||||
| Stockholders' equity | ||||||||||
| Preferred stock—10,000,000 authorized, none outstanding | ||||||||||
| Common stock no par value; 10,000,000 shares authorized; issued and outstanding: 632,400 in 2001 and 627,000 in 2000 | 6,324,000 | 6,270,000 | ||||||||
| Retained earnings | 732,293 | 116,325 | ||||||||
| Accumulated other comprehensive income—net unrealized gains (losses) on available-for-sale securities, net of taxes of $69,475 in 2001 | 99,976 | (22,078 | ) | |||||||
| TOTAL STOCKHOLDERS' EQUITY | 7,156,269 | 6,364,247 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 104,626,604 | $ | 96,845,862 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-8
COAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001 and 2000
| | 2001 | 2000 | ||||||
|---|---|---|---|---|---|---|---|---|
| INTEREST INCOME | ||||||||
| Interest and fees on loans | $ | 5,973,225 | $ | 5,326,746 | ||||
| Interest on investment securities | 759,591 | 1,070,091 | ||||||
| Interest on federal funds sold | 334,302 | 330,992 | ||||||
| Other interest income | 16,869 | 17,112 | ||||||
| TOTAL INTEREST INCOME | 7,083,987 | 6,744,941 | ||||||
| INTEREST EXPENSE | ||||||||
| Interest on money market and NOW accounts | 814,179 | 925,980 | ||||||
| Interest on savings deposits | 93,221 | 94,040 | ||||||
| Interest on time deposits | 1,838,401 | 1,817,524 | ||||||
| Interest on other borrowings | 27,482 | 20,024 | ||||||
| TOTAL INTEREST EXPENSE | 2,773,283 | 2,857,568 | ||||||
| NET INTEREST INCOME | 4,310,704 | 3,887,373 | ||||||
| Provision for credit losses | 207,447 | 300,000 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 4,103,257 | 3,587,373 | ||||||
| NONINTEREST INCOME | ||||||||
| Service charges on deposits accounts and other noninterest income | 174,395 | 166,883 | ||||||
| Gain on sale of loans and servicing fees | 339,192 | — | ||||||
| Gain on sale of securities | 94,705 | 2,963 | ||||||
| TOTAL NONINTEREST INCOME | 608,292 | 169,846 | ||||||
| NONINTEREST EXPENSE | ||||||||
| Salaries and benefits | 1,965,360 | 1,549,160 | ||||||
| Net occupancy expenses | 200,558 | 175,842 | ||||||
| Equipment and equipment expenses | 178,008 | 166,805 | ||||||
| Customer related expenses | 78,500 | 87,309 | ||||||
| Data processing | 323,789 | 270,282 | ||||||
| Insurance | 35,793 | 42,911 | ||||||
| Marketing and business promotion | 267,899 | 265,281 | ||||||
| Other professional expenses | 124,384 | 157,427 | ||||||
| Office expenses | 171,083 | 126,665 | ||||||
| Regulatory assessments | 54,891 | 45,759 | ||||||
| Other expenses | 180,196 | 123,444 | ||||||
| TOTAL NONINTEREST EXPENSE | 3,580,461 | 3,010,885 | ||||||
| INCOME BEFORE INCOME TAXES | 1,131,088 | 746,334 | ||||||
| Income taxes | 483,500 | 102,500 | ||||||
| NET INCOME | $ | 647,588 | $ | 643,834 | ||||
| Per Share Data | ||||||||
| Net income—basic | $ | 1.03 | $ | 1.03 | ||||
| Net income—diluted | $ | .99 | $ | 1.00 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-9
COAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 and 2000
| | Shares Outstanding | Common Stock | Comprehensive Income | Retained Earnings | Accumulated Other Comprehensive Income | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2000 | 625,800 | $ | 6,258,000 | $ | (527,509 | ) | $ | (233,989 | ) | $ | 5,496,502 | ||||||||
| Exercise of stock options | 1,200 | 12,000 | 12,000 | ||||||||||||||||
| Comprehensive income: | |||||||||||||||||||
| Net income | $ | 643,834 | 643,834 | 643,834 | |||||||||||||||
| Unrealized gains on available-for-sale securities | 214,874 | 214,874 | 214,874 | ||||||||||||||||
Less reclassification adjustments for gains included in net income | (2,963 | ) | (2,963 | ) | (2,963 | ) | |||||||||||||
| Total comprehensive income | $ | 855,745 | |||||||||||||||||
| Balance, December 31, 2000 | 627,000 | 6,270,000 | 116,325 | (22,078 | ) | 6,364,247 | |||||||||||||
| Exercise of stock options | 5,400 | 54,000 | 54,000 | ||||||||||||||||
| Cash dividends | (31,620 | ) | (31,620 | ) | |||||||||||||||
| Comprehensive income: | �� | ||||||||||||||||||
| Net income | $ | 647,588 | 647,588 | 647,588 | |||||||||||||||
| Unrealized gains on available-for-sale securities, net of taxes of $108,304 | 177,930 | 177,930 | 177,930 | ||||||||||||||||
Less reclassification adjustments for gains included in net income, net of taxes of $38,829 | (55,876 | ) | (55,876 | ) | (55,876 | ) | |||||||||||||
| Total comprehensive income | $ | 825,518 | |||||||||||||||||
| Balance, December 31, 2001 | 632,400 | $ | 6,324,000 | $ | 732,293 | $ | 99,976 | $ | 7,156,269 | ||||||||||
F-10
COAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 and 2000
| | 2001 | 2000 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| OPERATING ACTIVITIES | |||||||||||
| Net Income | $ | 647,588 | $ | 643,834 | |||||||
| Adjustments to reconcile net income to | |||||||||||
| net cash provided by operations: | |||||||||||
| Depreciation and amortization | 213,775 | 199,757 | |||||||||
| Provision for credit losses | 207,447 | 300,000 | |||||||||
| Realized gains in available-for-sale securities | (94,705 | ) | (2,963 | ) | |||||||
| Deferred taxes | (93,000 | ) | (189,000 | ) | |||||||
| Proceeds from loans sold | 6,368,470 | — | |||||||||
| Originations of loans held for sale | (6,066,459 | ) | — | ||||||||
| Gain on sale of loans | (330,610 | ) | — | ||||||||
| Net change in accrued interest, other assets and other liabilities | 337,477 | (48,998 | ) | ||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 1,189,983 | 902,630 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Net increase in loans | (14,912,675 | ) | (16,114,928 | ) | |||||||
| Net change in interest-bearing deposits | 200,000 | (200,000 | ) | ||||||||
| Purchase of available-for-sale securities | (15,594,376 | ) | (8,986,172 | ) | |||||||
| Purchase of held-to-maturity securities | — | (996,875 | ) | ||||||||
| Purchase of federal reserve stock | (17,450 | ) | (8,700 | ) | |||||||
| Proceeds from sale of available-for-sale securities | 10,547,517 | 2,002,963 | |||||||||
| Proceeds from maturities of available-for-sale securities | 14,000,000 | 3,000,000 | |||||||||
| Proceeds from maturities of held-to-maturity securities | 1,000,000 | 3,000,000 | |||||||||
| Purchase of premises and equipment | (496,581 | ) | (2,121,160 | ) | |||||||
| NET CASH USED IN INVESTING ACTIVITIES | (5,273,565 | ) | (20,424,872 | ) | |||||||
| FINANCING ACTIVITIES | |||||||||||
| Net increase in demand deposits and savings accounts | 5,178,964 | 12,714,674 | |||||||||
| Net increase in time deposits | 1,397,765 | 6,570,398 | |||||||||
| Proceeds from notes payable | 500,000 | — | |||||||||
| Principal payments on notes payable | (10,109 | ) | (9,334 | ) | |||||||
| Payments for dividends | (31,620 | ) | — | ||||||||
| Proceeds from exercise of stock options | 54,000 | 12,000 | |||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 7,089,000 | 19,287,738 | |||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 3,005,418 | (234,504 | ) | ||||||||
| Cash and cash equivalents at beginning of period | 9,543,230 | 9,777,734 | |||||||||
| Cash and cash equivalents at end of period | $ | 12,548,648 | $ | 9,543,230 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Interest paid | $ | 2,809,580 | $ | 2,821,440 | |||||||
| Income taxes paid | $ | 578,959 | $ | 220,800 | |||||||
F-11
COAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 and 2000
NOTE #1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of Coast Bancorp and its wholly owned subsidiary, Coast National Bank ("Bank"), collectively referred to herein as the "Company." All significant intercompany transactions have been eliminated.
Nature of Operations
Coast Bancorp operates Coast National Bank. The Bank has been organized as a single operating segment and operates four branches in San Luis Obispo, Arroyo Grande, Morro Bay, and Los Osos, California. The Bank's primary source of revenue is providing loans to customers, who are predominantly small and middle-market businesses and individuals.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Presentation of Cash Flows
For the purposes of reporting cash flows, cash and cash equivalents includes cash, noninterest-earning deposits and federal funds sold. Generally, federal funds are sold for one day periods.
Cash and Due From Banks
Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the federal reserve bank. The Bank complied with the reserve requirements as of December 31, 2001.
The Company maintains amounts due from banks which exceed federally insured limits. The Company has not experienced any losses in such accounts.
Investment Securities
Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.
Investments not classified as trading securities nor as held to maturity securities are classified as available-for-sale securities and recorded at fair value. Unrealized gains or losses on available-for-sale securities are excluded from net income and reported as an amount net of taxes as a separate component of other comprehensive income included in stockholders' equity. Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method. Realized gains or losses on sales of held-to-maturity or available-for-sale securities are recorded using the specific identification method.
F-12
Loans Held for Sale
SBA and other governmental guaranteed loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability. Gains and losses on sales of loans are included in noninterest income.
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days or when, in the opinion of management, there is reasonable doubt as to collectibility. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.
The Bank considers a loan to be impaired when it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Measurement of impairment is based on the expected future cash flows of an impaired loan which are to be discounted at the loan's effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Bank selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. The Bank recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans.
Provision and Allowance for Credit Losses
The allowance for credit losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions.
F-13
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to ten years for furniture and fixtures and forty years for buildings. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term. Whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.
Income Taxes
Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is "more likely than not" that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryforward periods.
Disclosure About Fair Value of Financial Instruments
Statement of Financial Accounting Standard ("SFAS") No. 107 specifies the disclosure of the estimated fair value of financial instruments. The Company's estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.
However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the balance sheet date and, therefore, current estimates of fair value may differ significantly from the amounts presented in the accompanying notes.
Comprehensive Income
Beginning in 1998, the Company adopted SFAS No. 130,"Reporting Comprehensive Income," which requires the disclosure of comprehensive income and its components. Changes in unrealized gains (losses) on available-for-sale securities net of income taxes is the only component of accumulated other comprehensive income for the Bank.
F-14
Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit, see Note #11. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.
Earnings Per Shares (EPS)
Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25,"Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The pro forma effects of adoption are disclosed in Note #9.
Current Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142,"Accounting for Goodwill and Other Intangible Assets," effective starting with fiscal years beginning after December 15, 2001. This Statement establishes new accounting standards for goodwill and continues to require the recognition of goodwill as an asset but does not permit amortization of goodwill as previously required by the APB Opinion No. 17. The Statement also establishes a new method of testing goodwill for impairment. It requires goodwill to be separately tested for impairment at a reporting unit level. The amount of goodwill determined to be impaired would be expensed to current operations. Management believes that the adoption of the statement will not have a material effect on the Company's consolidated financial statements.
Reclassification
Certain reclassifications have been made in the 2000 consolidated financial statements to conform to the presentation used in 2001. These classifications are of a normal recurring nature.
F-15
NOTE #2—INVESTMENT SECURITIES
Amortized cost and market values of securities are as follows:
| | December 31, 2001 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||
| Available-for-sale securities: | |||||||||||||
| U.S. Treasury obligations | $ | 8,094,534 | $ | 191,493 | $ | — | $ | 8,286,027 | |||||
| U.S. Agency obligations | 3,000,000 | 2,588 | (24,630 | ) | 2,977,958 | ||||||||
| $ | 11,094,534 | $ | 194,081 | $ | (24,630 | ) | $ | 11,263,985 | |||||
| | December 31, 2000 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||
| Held-to-maturity securities: | |||||||||||||
| U.S. Treasury obligations | $ | 997,662 | $ | 3,860 | $ | — | $ | 1,001,522 | |||||
| Available-for-sale securities: | |||||||||||||
| U.S. Treasury obligations | $ | 8,989,994 | $ | 32,444 | $ | — | $ | 9,022,438 | |||||
| U.S. Agency obligations | 11,000,071 | — | (54,523 | ) | 10,945,548 | ||||||||
| $ | 19,990,065 | $ | 32,444 | $ | (54,523 | ) | $ | 19,967,986 | |||||
Gross realized gains on sales of available-for-sale securities were $94,705 in 2001 and $3,900 in 2000. Gross realized losses on sales of available-for-sale securities were $937 in 2000.
Securities with a carrying value of $2,013,054 and $1,000,000 at December 31, 2001 and 2000, respectively, were pledged to secure public monies as required by law.
The amortized cost and fair values of investment securities available-for-sale at December 31, 2001, by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | Securities Available-for-Sale | |||||
|---|---|---|---|---|---|---|
| | Amortized Cost | Fair Value | ||||
| Due in one year or less | $ | 1,000,000 | $ | 1,002,588 | ||
| Due from one year to five years | 10,094,534 | 10,261,397 | ||||
| $ | 11,094,534 | $ | 11,263,985 | |||
NOTE #3—LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within San Luis Obispo, California and its surrounding communities. Although the Bank seeks to avoid concentrations of loans
F-16
to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank's market area and, as a result, the Bank's loan and collateral portfolios are, to some degree, concentrated in those industries.
The Bank also originates SBA and governmental guaranteed related loans for sale to governmental agencies and institutional investors. At December 31, 2001 the Bank was servicing approximately $5,944,000 in SBA and governmental guaranteed loans previously sold.
As described in Note #11, these consolidated financial statements do not reflect other various commitments to extend credit or letters of credit, which arise in the normal course of business.
A summary of the changes in the allowance for credit losses follows:
| | 2001 | 2000 | ||||
|---|---|---|---|---|---|---|
| Balance, beginning of year | $ | 700,000 | $ | 400,000 | ||
Provision for credit losses | 207,447 | 300,000 | ||||
| Loans charged off, net of recoveries | (57,447 | ) | — | |||
| Balance, end of year | $ | 850,000 | $ | 700,000 | ||
The Bank did not have any impaired loans during 2001 and 2000.
NOTE #4—PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 2001 and 2000, follows:
| | 2001 | 2000 | |||||
|---|---|---|---|---|---|---|---|
| Land | $ | 2,047,962 | $ | 2,047,962 | |||
| Building | 1,042,137 | 1,045,634 | |||||
| Leasehold improvements | 269,159 | 269,159 | |||||
| Furniture, fixtures and equipment | 821,227 | 739,470 | |||||
| Construction in progress | 400,115 | — | |||||
| 4,580,600 | 4,102,225 | ||||||
| Less: Accumulated depreciation and amortization | (686,799 | ) | (491,230 | ) | |||
| $ | 3,893,801 | $ | 3,610,995 | ||||
The Bank has entered into leases for its branches and operating facilities, which expire at various dates through 2004. These leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses. Rental expense relating to these leases were approximately $92,000 in 2001 and $92,000 in 2000.
F-17
The approximate future minimum annual payments for these leases by year are as follows:
| Year | Amount | ||
|---|---|---|---|
| 2002 | $ | 80,758 | |
| 2003 | 20,122 | ||
| 2004 | 3,255 | ||
| $ | 104,135 | ||
The minimum rental payments shown above are given for the existing lease obligations and are not a forecast of future rental expense.
NOTE #5—DEPOSITS
At December 31, 2001, all time deposits were scheduled to mature in 2002, except for $366,503 that matures in one to five years.
NOTE #6—NOTES PAYABLE
Notes payable consist of the following:
| | 2001 | 2000 | ||||
|---|---|---|---|---|---|---|
| 8% noted payable to an individual, secured by real property. Payable in monthly installments of $2,447 including principal and interest, due October 14, 2014 | $ | 235,073 | $ | 245,182 | ||
6% unsecured note payable to an individual stockholder of the Company. Interest payable monthly, principal due November 1, 2002, with an option to extend one additional year | 500,000 | — | ||||
| $ | 735,073 | $ | 245,182 | |||
NOTE #7—INCOME TAXES
The provisions for income taxes included in the statements of income consist of the following:
| | 2001 | 2000 | ||||||
|---|---|---|---|---|---|---|---|---|
| Current: | ||||||||
| Federal | $ | 430,100 | $ | 211,500 | ||||
| State | 146,400 | 80,000 | ||||||
| 576,500 | 291,500 | |||||||
| Deferred | (93,000 | ) | 22,000 | |||||
| Net change in valuation allowance | — | (211,000 | ) | |||||
| $ | 483,500 | $ | 102,500 | |||||
F-18
Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The Company's principal timing differences are from loan loss provision accounting, and depreciation differences.
The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying statements of financial condition:
| | 2001 | 2000 | ||||||
|---|---|---|---|---|---|---|---|---|
| Deferred tax assets: | ||||||||
| Organization costs | $ | 12,000 | $ | 35,000 | ||||
| Allowance for credit losses | 227,000 | 142,000 | ||||||
| Premises and equipment due to depreciation difference | 3,000 | — | ||||||
| Other assets/liabilities | 40,000 | 26,000 | ||||||
| 282,000 | 203,000 | |||||||
| Deferred tax Liabilities: | ||||||||
| Market value adjustment on investment securities | (69,000 | ) | — | |||||
| Premises and equipment due to depreciation difference | — | (14,000 | ) | |||||
| (69,000 | ) | (14,000 | ) | |||||
| Net deferred tax assets | $ | 213,000 | $ | 189,000 | ||||
A comparison of the federal statutory income tax rates to the Company's effective income tax rates follow:
| | 2001 | 2000 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amount | Rate | Amount | Rate | |||||||
| Statutory federal tax | $ | 385,000 | 34.0 | % | $ | 254,000 | 34.0 | % | |||
| State franchise tax, net of federal benefit | 82,000 | 7.2 | % | 54,000 | 7.2 | % | |||||
| Reduction in valuation allowance | — | — | (211,000 | ) | (28.3 | %) | |||||
| Other items, net | 16,500 | 1.5 | % | 5,500 | 0.7 | % | |||||
| Actual tax expense | $ | 483,500 | 42.7 | % | $ | 102,500 | 13.6 | % | |||
NOTE #8—EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the net income and number of shares used to compute EPS:
| | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Net Income | Shares | Net Income | Shares | ||||||
| Used in basic EPS | $ | 647,588 | 630,957 | $ | 643,834 | 626,707 | ||||
| Dilutive effect of outstanding stock options | 21,768 | 19,890 | ||||||||
| Used in dilutive EPS | $ | 647,588 | 652,725 | $ | 643,834 | 646,597 | ||||
F-19
NOTE #9—STOCK OPTION PLAN
At December 31, 2001, the Company had a fixed option plan under which 187,500 shares of the Company's common stock may be issued at not less than 100% of the fair market value at the date the options are granted. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its fixed stock option plan. Had compensation costs for this plan been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced for 2001 and 2000 to the pro forma amounts indicated below:
| | | 2001 | 2000 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Net income | As reported | $ | 647,588 | $ | 643,834 | ||||
| Pro forma | $ | 526,901 | $ | 534,041 | |||||
Per share data | |||||||||
| Basic EPS | As reported | $ | 1.03 | $ | 1.03 | ||||
| Pro forma | $ | .84 | $ | .85 | |||||
Diluted EPS | As reported | $ | ...99 | $ | 1.00 | ||||
| Pro forma | $ | .81 | $ | .83 | |||||
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2001 and 2000, respectively; risk-free rate of 4% and 6.00%, dividend yields of 0.33% and 0%; volatility of 21% and 23%, and an expected life of five years, respectively.
A summary of the status of the Company's fixed stock option plan as of December 31, and changes during the year ending is presented below:
| | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||
| Outstanding, beginning of year | 125,500 | $ | 12.09 | 118,500 | $ | 11.85 | ||||
| Granted | 15,000 | $ | 14.13 | 16,000 | $ | 14.00 | ||||
| Exercised | (5,400 | ) | $ | 10.00 | (1,200 | ) | $ | 10.00 | ||
| Canceled | (1,600 | ) | $ | 12.66 | (7,800 | ) | $ | 12.56 | ||
| Outstanding, end of year | 133,500 | $ | 12.40 | 125,500 | $ | 12.09 | ||||
| Options exercisable at year-end | 88,034 | $ | 12.02 | 64,238 | $ | 11.66 | ||||
| Weighted-average fair value of options granted during the year | $ | 3.64 | $ | 4.62 | ||||||
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The following table summarizes information about fixed options outstanding at December 31, 2001:
| | Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Exercise Price | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||
| $5.00 to $10.99 | 55,000 | 5.45 Years | $ | 10.00 | 44,000 | $ | 10.00 | |||||
| $11.00 to $15.99 | 78,500 | 6.51 Years | $ | 14.08 | 44,034 | $ | 14.03 | |||||
| 133,500 | 6.07 Years | $ | 12.40 | 88,034 | $ | 12.02 | ||||||
NOTE #10—RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain directors and the companies with which they are associated. In the Bank's opinion, all loans and loan commitments to such parties are made on substantially the same terms including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. The balance of these loans outstanding at December 31, 2001 and 2000, was as follows:
| | 2001 | 2000 | |||||
|---|---|---|---|---|---|---|---|
| Beginning balance | $ | 1,611,445 | $ | 1,640,459 | |||
| Additions | 4,409,853 | 917,016 | |||||
| Payments | (4,030,129 | ) | (946,030 | ) | |||
| Ending balance | $ | 1,991,169 | $ | 1,611,445 | |||
NOTE #11—COMMITMENTS
In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the statement of financial position.
The Bank's exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for loans reflected in the consolidated financial statements.
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As of December 31, 2001 and 2000, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk:
| | 2001 | 2000 | ||||
|---|---|---|---|---|---|---|
| Commitments to extend credit | $ | 20,354,000 | $ | 16,566,000 | ||
| Standby letters of credit | 2,020,000 | 720,000 | ||||
| $ | 22,374,000 | $ | 17,286,000 | |||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments to guarantee the performance of a Bank customer to a third party. Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank is based on management's credit evaluation of the customer.
NOTE #12—REGULATORY MATTERS
Coast Bancorp and the 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt, corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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 Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the Office of the Comptroller of the Currency ("OCC") categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well-capitalized or adequately capitalized, the
F-22
Bank must maintain minimum ratios as set forth in the table below. The following table also sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
| | | | Amount of Capital Required | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Actual Capital | To Be Adequately Capitalized | To Be Well-Capitalized | ||||||||||||||
| | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||
| As of December 31, 2001 | |||||||||||||||||
| Total capital to risk-weighted assets | $ | 8,327 | 10.48 | % | $ | 6,354 | 8.0 | % | $ | 7,943 | 10.0 | % | |||||
| Tier 1 capital to risk-weighted assets | $ | 7,477 | 9.41 | % | $ | 3,177 | 4.0 | % | $ | 4,766 | 6.0 | % | |||||
| Tier 1 capital to average assets | $ | 7,477 | 7.15 | % | $ | 4,183 | 4.0 | % | $ | 5,229 | 5.0 | % | |||||
As of December 31, 2000 | |||||||||||||||||
| Total capital to risk-weighted assets | $ | 7,086 | 10.93 | % | $ | 5,189 | 8.0 | % | $ | 6,486 | 10.0 | % | |||||
| Tier 1 capital to risk-weighted assets | $ | 6,386 | 9.85 | % | $ | 2,594 | 4.0 | % | $ | 3,892 | 6.0 | % | |||||
| Tier 1 capital to average assets | $ | 6,386 | 7.13 | % | $ | 3,584 | 4.0 | % | $ | 4,481 | 5.0 | % | |||||
The Bank is restricted to the amount of dividends which can be paid. Dividends declared by national banks that exceed the net income (as defined) for the current year plus retained net income for the preceding two years must be approved by the OCC. The Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above.
NOTE #13—FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.
F-23
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Financial Assets
The carrying amounts of cash, short term investments, due from customers on acceptances, and Bank acceptances outstanding are considered to approximate fair value. Short term investments include federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with Banks. The fair values of investment securities, including available for sale, are generally based on quoted market prices. The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand, commercial paper, and other borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long term debt is based on rates currently available to the Bank for debt with similar terms and remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments are not deemed to be material.
The estimated fair value of financial instruments at December 31, 2001 and 2000 are summarized as follows (dollar amounts in thousands):
| | 2001 | 2000 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
| Assets: | |||||||||||||
| Cash and cash equivalents | $ | 12,549 | $ | 12,549 | $ | 9,543 | $ | 9,543 | |||||
| Interest-bearing deposits | — | — | 200 | 200 | |||||||||
| Investment securities | 11,264 | 11,264 | 20,966 | 20,970 | |||||||||
| Loans receivable | 75,794 | 77,204 | 61,200 | 60,978 | |||||||||
| Accrued interest receivable | 436 | 436 | 815 | 815 | |||||||||
| Federal reserve bank stock | 189 | 189 | 172 | 172 | |||||||||
Liabilities: | |||||||||||||
| Non-interest bearing deposits | 24,831 | 24,831 | 21,398 | 21,398 | |||||||||
| Interest bearing deposits | 71,696 | 71,707 | 68,552 | 68,557 | |||||||||
| Notes Payable | 735 | 753 | 245 | 222 | |||||||||
| Accrued interest payable | 50 | 50 | 87 | 87 | |||||||||
F-24
NOTE #14—FORMATION OF COAST BANCORP
On May 31, 2001, Coast Bancorp acquired Coast National Bank by issuing 631,200 shares of common stock in exchange for the surrender of all outstanding shares of Coast National Bank's common stock. There was no cash involved in this transaction. The acquisition was accounted for as a pooling of interest and the consolidated financial statements contained herein have been restated to give full effect to this transaction.
NOTE #15—CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
Coast Bancorp operates Coast National Bank. Coast Bancorp commenced operations during 2001. The earnings of the subsidiary are recognized on the equity method of accounting. Condensed financial statements of the parent company only are presented below:
CONDENSED BALANCE SHEET
| | Year Ended December 31, 2001 | |||
|---|---|---|---|---|
| ASSETS: | ||||
| Cash | $ | 65,269 | ||
| Investment in Coast National Bank | 7,591,000 | |||
| $ | 7,656,269 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||
| Note payable | $ | 500,000 | ||
| Stockholders' equity | 7,156,269 | |||
| $ | 7,656,269 | |||
CONDENSED STATEMENT OF INCOME
| | Year Ended December 31, 2001 | ||||||
|---|---|---|---|---|---|---|---|
| INCOME: | |||||||
| Cash dividends from Subsidiary | $ | 25,000 | |||||
| TOTAL INCOME | 25,000 | ||||||
EXPENSES: | |||||||
| Interest on note payable | 7,828 | ||||||
| Other | 20,283 | ||||||
| TOTAL EXPENSES | 28,111 | ||||||
| LOSS BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY | (3,111 | ) | |||||
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY | 650,699 | ||||||
| NET INCOME | $ | 647,588 | |||||
F-25
CONDENSED STATEMENT OF CASH FLOWS
| | Year Ended December 31, 2001 | ||||||
|---|---|---|---|---|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net income | $ | 647,588 | |||||
| Noncash items included in net income: | |||||||
| Equity in income of Subsidiary | (675,699 | ) | |||||
| NET CASH USED IN OPERATING ACTIVITIES | (28,111 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
| Investment in Subsidiary | (412,000 | ) | |||||
| Dividends received from Subsidiary | 25,000 | ||||||
| NET CASH USED BY INVESTING ACTIVITIES | (387,000 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Proceeds from note payable | 500,000 | ||||||
| Proceeds from exercise of stock options | 12,000 | ||||||
| Dividends Paid | (31,620 | ) | |||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 480,380 | ||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 65,269 | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | — | ||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 65,269 | |||||
F-26
Item 24. Indemnification of Directors and Officers
Section 317 of the California Corporations Code authorizes a court to award, or a corporation's board of Directors to grant, indemnity to directors, officers, employees and other agents of the corporation in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933 as amended.
Article SIXTH of the Articles of Incorporation of Coast Bancorp provides for indemnification of agents including directors, officers and employees, through bylaws, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code. Article FIFTH of Coast's Articles further provides for the elimination of director liability for monetary damages to the maximum extent allowed by California law.
Article VI of Coast Bancorp's Bylaws provides that Coast Bancorp shall indemnify its "agents", as defined in Section 317 of the California Corporations Code, to the full extent permitted by said Section, as amended from time to time, or as permitted by any successor statute to said Section.
Coast Bancorp maintains insurance covering its directors, officers and employees against any liability asserted against any of them and incurred by any of them, whether or not Coast Bancorp would have the power to indemnify them against such liability under the provisions of applicable law or the provisions of Coast Bancorp's Articles and Bylaws.
Item 25. Other Expenses of Issuance and Distribution(1)
All expenses of the Offering will be borne by Coast. The following table sets forth an itemized estimate of such expenses:
| Registration Filing Fees | $ | 276 | |
| Financial Advisor | 15,000 | ||
| Transfer Agent Fees and Expenses | — | ||
| Blue Sky Filing Fees and Expenses | 5,000 | ||
| Printing and Engraving | 20,000 | ||
| Legal Fees and Expenses | 45,000 | ||
| Accounting Fees and Expenses | 2,000 | ||
| Miscellaneous | 7,750 | ||
| Total | $ | 95,026 |
Item 26. Recent Sales of Unregistered Securities
On May 31, 2001, Coast Interim National Bank (a wholly-owned subsidiary of Registrant), merged with and into Coast National Bank resulting in the shareholders of the Bank becoming the shareholders of the Registrant, and further resulting in the Bank becoming the wholly-owned subsidiary of the Registrant. The reorganization took place in accordance with a Plan of Reorganization and Merger Agreement entered into as of March 1, 2001 by and among Registrant, the Bank and Interim Bank. Pursuant to the Plan of Reorganization each share of the Bank's outstanding Common Stock was converted into one share of Bancorp's Common Stock, resulting in the issuance of 631,200 shares of the Registrant's common stock.
II-1
Shares of Registrant's common stock issued in consideration of the reorganization were issued pursuant to exemption from registration provided by Section 3(a)(12) of the Securities Act of 1933, as amended.
| Item 27. | Exhibits | |
|---|---|---|
| 2. | Plan of Acquisition, Reorganization, Arrangement of Merger dated March 1, 2001(2) | |
3.1 | Articles of Incorporation of Bancorp(2) | |
3.2 | Bylaws of the Bancorp(2) | |
5.1 | Opinion re: Legality | |
10.1 | Coast Bancorp Employee Stock Option Plan and specimen Non-Statutory And Incentive Stock Option Agreements(1) | |
10.2 | Coast Bancorp Directors Stock Option Plan and specimen Non-Statutory Agreement(1) | |
10.3 | Employment contract by and between Jack C. Wauchope and Coast National Bank(2) | |
10.4 | Employment contract by and between Thomas Sherman and Coast National Bank(2) | |
10.5 | Agreement dated March 28, 2002 by and between Coast Bancorp and Carpenter & Company | |
11. | Statement re computation of per share earning. Included in footnote 8 to the Registrant's audited financial statements included in this Annual Report. | |
21. | Subsidiaries of the Bancorp: Coast National Bank | |
23.1 | Consent of Counsel is included with the opinion re: legality as Exhibit 5.1 to the Registration Statement. | |
23.2 | Consent of Vavrinek, Trine, Day & Co. LLP as independent accountants for Coast Bancorp and Coast National Bank. | |
23.3 | Consent of the Carpenter & Company as financial advisor to Coast Bancorp.* | |
24 | Power of Attorney | |
99.1 | Opinion of Carpenter & Company dated , 2002 as financial advisor to Coast Bancorp* | |
99.2 | Stock Subscription Application |
II-2
Item 28. Undertakings
The undersigned Registrant hereby undertakes to:
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
II-3
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Luis Obispo, State of California, on May 28, 2002
| COAST NATIONAL BANK | ||||
| By: | /s/ JACK C. WAUCHOPE Jack C. Wauchope President/Chief Executive Officer Chairman of the Board | |||
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
| Signature | Title | Date | ||
|---|---|---|---|---|
| /s/ JACK C. WAUCHOPE Jack C. Wauchope | President/Chief Executive Officer, Chairman of the Board, and Director (Principal Executive Officer) | May 28, 2002 | ||
/s/ MARILYN BRITTON Marilyn Britton | Director | May 28, 2002 | ||
/s/ DARIO DOMENGHINI Dario Domenghini | Director | May 28, 2002 | ||
/s/ JOHN F. GUHRING John F. Guhring | Director | May 28, 2002 | ||
/s/ JAMES M. KANEY James M. Kaney | Director | May 28, 2002 | ||
/s/ MICHAEL A. LADY Michael A. Lady | Director | May 28, 2002 | ||
/s/ GENE D. MINTZ Gene D. Mintz | Director | May 28, 2002 | ||
/s/ JACK W. ROBASCIOTTI Jack W. Robasciotti | Director | May 28, 2002 | ||
/s/ THOMAS J. SHERMAN Thomas J. Sherman | Executive Vice President, Chief Financial Officer, and Director (Principal Financial Officer) | May 28, 2002 | ||
/s/ DAN H. WIXOM Dan H. Wixom | Director | May 28, 2002 |
II-4
| Exhibit Number | Description of Exhibit | |
|---|---|---|
| 3. | Plan of Acquisition, Reorganization, Arrangement of Merger dated March 1, 2001(2) | |
3.3 | Articles of Incorporation of Bancorp(2) | |
3.4 | Bylaws of the Bancorp(2) | |
5.1 | Opinion re: Legality | |
10.1 | Coast Bancorp Employee Stock Option Plan and specimen Non-Statutory And Incentive Stock Option Agreements(1) | |
10.2 | Coast Bancorp Directors Stock Option Plan and specimen Non-Statutory Agreement(1) | |
10.3 | Employment contract by and between Jack C. Wauchope and Coast National Bank(2) | |
10.4 | Employment contract by and between Thomas Sherman and Coast National Bank(2) | |
10.5 | Agreement dated March 28, 2002 by and between Coast Bancorp and Carpenter & Company | |
11. | Statement re computation of per share earning. Included in footnote 8 to the Registrant's audited financial statements included in this Annual Report. | |
21. | Subsidiaries of Coast Bancorp: Coast National Bank | |
23.1 | Consent of Counsel is included with the opinion re: legality as Exhibit 5.1 to the Registration Statement. | |
23.2 | Consent of Vavrinek, Trine, Day & Co. LLP as independent accountants for Coast Bancorp and Coast National Bank. | |
23.3 | Consent of the Carpenter & Company as financial advisor to Coast Bancorp.* | |
24 | Power of Attorney | |
99.1 | Opinion of Carpenter & Company dated , 2002 as financial advisor to Coast Bancorp* | |
99.2 | Stock Subscription Application |
