Coast Bancorp 10QSB Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

ý	QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2002
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
	For the transition period from                          to

Commission File No. 000-32827

COAST BANCORP

(Exact name of Registration as Specified in its Charter)

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

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

Transitional Small Business Disclosure Format

(Check one)

yes: o  no: ý

FORWARD LOOKING STATEMENTS

CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDE FORWARD-LOOKING INFORMATION WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND ARE SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSE SECTIONS.  THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.  SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS: COMPETITIVE PRESSURE IN THE BANKING INDUSTRY INCREASES SIGNIFICANTLY; CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE MARGINS; GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS A DETERIORATION IN CREDIT QUALITY AND AN INCREASE IN THE PROVISION FOR POSSIBLE LOAN LOSSES; CHANGES IN THE REGULATORY ENVIRONMENT; CHANGES IN BUSINESS CONDITIONS, PARTICULARLY IN SAN LUIS OBISPO COUNTY; VOLATILITY OF RATE SENSITIVE DEPOSITS; OPERATIONAL RISKS INCLUDING DATA PROCESSING SYSTEMS FAILURES OR FRAUD; ASSET/LIABILITY MATCHING RISKS AND LIQUIDITY RISKS; AND CHANGES IN THE SECURITIES MARKETS.

THEREFORE, THE INFORMATION SET FORTH THEREIN SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF COAST BANCORP AND COAST NATIONAL BANK.

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

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INDEX

COAST BANCORP

PART I — FINANCIAL INFORMATION

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

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PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

Statement of Financial Condition (unaudited)

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

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Statement of Operations (unaudited)

(In Thousands, except for per share numbers)

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

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Statement of changes in Shareholders’ Equity

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

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

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COAST BANCORP

Statement of Cash Flows (unaudited)

(In Thousands)

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

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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 Bank’s Annual Report for the year ended December 31, 2001 filed on Form 10-KSB.

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 and six month period ended June 30, 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 Form 10-QSB 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 Bank 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 June 30,		For the Six Months Ended June 30,
	2002	2001	2002	2001
	Shares	Shares	Shares	Shares
Used in Basic EPS	632,400	630,870	632,400	630,150
Dilutive Effect of Outstnding Stock Options	20,305	21,308	26,144	19,292
Earnings per share — Basic	652,705	652,178	658,544	649,442

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The unaudited financial statements have been prepared in accordance with the instructions to form 10-QSB and contain statements relating to future results of the Company that are considered to be “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to, among other things, credit loss reserve adequacy, and simulation of changes in interest rates and litigation results.  Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within the Company’s markets, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological change, changes in law, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, the California energy crisis, success in gaining regulatory approvals when required as well as other risks and uncertainties detailed elsewhere in this quarterly report or from time to time in the filings of the Company with the Securities and Exchange Commission.  Such forward-looking statements speak only as of the date on which such statements are made, and the corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.  The accompanying financial information should be read in conjunction with the Bank’s Annual Report on Form 10-KSB for the year ended December 31, 2001.

On June 1, 2001 Coast Bancorp acquired all of the outstanding shares of Coast National Bank’s common stock in a non-cash transaction.  Coast Bancorp has no material business activity other than the involvement in Coast National Bank.  Financial information presented herein for June 30, 2002 and comparative information for December 31, 2001 and  June 30, 2001.

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

Overview

For the three months ended June 30, 2002 the company reported net income of $234,000 or $0.36 diluted earnings per share compared to net income of $141,000 and $0.21 diluted earnings per share for the same period during 2001.  For the six month ended June 30, 2002 the company reported net income of $370,000 or $0.56 diluted earnings per share compared to net income of $286,000 and $0.44 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 $2,336,000 for the six month ended June 30, 2002, compared to $2,072,000 for the quarter ended June 30, 2001 an increase of 12.7%.

The following table sets forth the components of net interest income, average earning assets and net interest margin (in thousands): Net interest margin is calculated by using net interest income divided by average earning assets.

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

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

Provision for Loan Losses

Management of the Company believes that the allowance for loan losses is adequate.  The Company has established a monitoring system for loans in order to identify impaired loans and potential problem loans and to permit periodic evaluation of impairment and adequacy of the allowance for loan losses in a timely manner.  The monitoring system and allowance for loan losses methodology have evolved over a period of years, and loan classifications have been incorporated into the determination of the allowance for loan losses.  This monitoring system and allowance methodology includes a loan-by-loan analysis for all classified loans as well as loss factors for the balance of the unclassified portfolio.  Classified loans are reviewed individually to estimate the amount of probable losses that needs to be included in the allowance.  These reviews include analysis of financial information as well as evaluation of collateral securing the credit.  Loss factors on the unclassified portion of the portfolio are based on such factors as historical loss experience, current portfolio delinquency and trends, and other inherent risk factors such as economic conditions, concentrations in the portfolio, risk levels of particular loan categories, internal loan review and management oversight.

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

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

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

Noninterest Income

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

Noninterest Expense

Noninterest expense represents salaries, occupancy expenses, professional expenses, outside services and other miscellaneous expenses necessary to conduct business.  Noninterest expense for the three months ended June 30, 2002 totaled $1,052,000 compared to $898,000 for the same period in 2001 a 17.1% increase. Noninterest expense for the six months ended June 30, 2002 totaled $2,044,000 compared to $1,782,000 for the same period in 2001 a 14.7% increase. This increase is primarily due to the opening of a government guaranteed lending department specializing in Small Business Administration lending programs during the latter part of 2000 and the overall expansion of the customer base.

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Income Taxes

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

Financial Condition

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

Asset Quality

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

Capital

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

Shareholders equity at June 30, 2002 was $7.5 million, an increase of  $.4 million over $ 7.1 million at December 31, 2001.  Shareholders equity increased primarily from net income of  $370,000.

The Company is required to meet certain minimum risk-based capital guidelines and leverage ratios set by the banks 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.

Coast Bancorp maintains capital ratios above the Federal regulatory guidelines for “well-capitalized” bank holding companies.  The ratios are as follows:

	Minimum Requirements		Well Capitalized		Six Months Ended June 30, 2002		December 31, 2001
Total risk-based capital ratio	8.00	%	10.00	%	10.51	%	10.48	%
Tier 1 risk-based capital ratio	4.00	%	6.00	%	9.39	%	9.41	%
Tier 1 leverage capital ratio	4.00	%	5.00	%	7.53	%	7.15	%

Liquidity

Management is not aware of any future capital expenditures or other significant demands on commitments, which would severely impair liquidity.  For the six months ended June 30, 2002 the bank has a loan to deposit ratio of 81.9% and total investments to assets of 14.72%.

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PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

                Not applicable.

ITEM 2 — CHANGES IN SECURITIES

                Not applicable.

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

                Not applicable.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)           Coast Bancorp’s  2002 Annual Meeting of Shareholders was held on May 22, 2002 (the “Meeting”).  The  Meeting involved the following proposals:

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

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

(b)           Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. There were no solicitations in opposition management’s nominees as listed in the proxy statement, and all such nominees were elected.

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

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

.

ITEM 5 — OTHER INFORMATION

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

ITEM 6 — EXHIBITS AND REPORTS OF FORM 8-K

A)Exhibits

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

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

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Signatures

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

COAST BANCORP

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

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

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